Portugal and life beyond the budget

In 2003, as part of the yearly address to commemorate the anniversary of the democratic revolution, then President of the Republic Jorge Sampaio famously proclaimed that “there was life beyond the budget.” In the middle of his last term in office, more than qualifying the importance of keeping sound public finances, he was taking a jab at what were being perceived as unrepeatable budgetary measures exclusively designed to meet the strict numeric constraints imposed by Europe’s idea of monetary union regulation: the Stability and Growth Pact. 

What he was really saying was: “More economic strategy and less accounting, please.”

The statement, however, was taken as validating the fierce opposition to the spending cuts clumsily put forward by the one year-old centre-right coalition. Even if inadvertently, that statement helped to weaken the government’s impetus and, more importantly, failed to incite a much needed national debate about the role and possibilities of the state in a maturing, mostly stagnant, economy. Ten years later, the country’s public debt has doubled to 125 percent of GDP. 

In the grand scheme of things, Portugal was just another vulnerable economy affected by bond market phenomena way beyond its control. Had the U.S. private debt crisis not spread into European public debt markets in 2009, interest payments wouldn’t have squeezed the last drop of elasticity left in Portuguese public finances.

It was not as if their decade-long structural dynamics had changed overnight, as if market movements were simply reflecting recent economic mismanagement. Public debt had been growing, yes, but not too much. The yearly deficit consistently above pre-agreed targets, surely; but hardly anyone was complaining.

Growth was feeble, true; but whose wasn’t? In stable macro-economic circumstances Portugal’s vulnerability could have had a much better run. However, in the particular contour of things, the Portuguese society was blatantly ignorant of its dependence on financial markets and the resulting negligence had to prove costly.

Portugal has not had a balanced budget – never mind, a surplus – in living memory. Almost literally! In the last twenty years alone the deficit has averaged 4 percent of GDP and that is excluding the 2010-2011 double-digit debacles. The notion that the State’s balance-sheet will be negative each year is so culturally ingrained that mere decreases in deficit to GDP ratio are celebrated as outstanding political achievements.

It is rarely considered that, at some point in time, the rationale has to allow for deficits to be compensated by surpluses; otherwise the debt becomes unmanageable. If the current financial travails are to do any good, they have to generate a serious reflection of how the country wants to govern itself after it gets its economic sovereignty back. Ultimately, the Portuguese will have to find a higher level of consistency between their public spending aspirations and their ability and/or willingness to finance state’s revenues. Thus far, we have seen scarce evidence of that discussion catching fire.

The current government’s arrival to power in June 2011 was part of a fully deliberate strategy by the two right-of-center parties of expediting foreign financial intervention. By not allowing parliament to pass yet another set of emergency austerity measures designed by the incumbent Socialist Party government to “calm markets down,” formal external assistance was made inevitable and elections precipitated. With the country fiddling with default, the Socialists were forced to accept the stringent loan conditions set up by the now famous “Troika” of the IMF, the ECB and the European Commission.

A couple of months later they had been replaced by a new government. The message was clear. The country badly needed an overhauling reform of its public sector and it would be better off by just putting itself out of its misery and admit the necessity of a rescue package. That it would come with many strings attached would be a bonus, not a curse. Suddenly the level of bond yields was opening news bulletins and financial jargon permeated conversations in the coffee corner. The Portuguese gradually learned they had signed off on a set of public finance targets that would require immediate and decisive action. Unaware of the extreme structural rigidity of their own debt, they would soon find out that many of those actions would have to come from the revenue side.

Even though the prime minister’s entire ascendancy to political prominence had been ideologically imprinted by a brand of vigorous economic liberalism uncommon in his party – the centre-right Social-Democrats – once in power, the government quickly dispelled campaign pledges to focus budget balancing efforts on self-identified redundant spending.

A special 50 percent income tax was immediately levied on Christmas’ extra pay – a measure as drastic as it was unexpected. In the next two years, the Portuguese suffered a taxation surge that would see energy taxes rise by more than 15 percentage points, a massive upward restructuring in income tax brackets, and an incompetent real estate revaluation process shamelessly designed to pocket quick money for the state’s treasury through property taxes. On the expenditure side, “redundant spending” turned into salary cuts to roughly 600.000 public-sector workers, plus significant pension cuts to a few hundreds of thousands of pensioners more. Once again, the blind pursuit of target indicators crowded out any chance for reasonable economic strategy.

Very few economies could withstand such an extreme shock to household disposable income, much less  one that has been combining stagnation with growing levels of private debt for the good part of the last 15 years. Hence, naturally GDP contracted 1.3 percent in 2011 and a further 3.2 percent in 2012. It is expected to have fallen at least a further 1.5 percent in 2013. The budget deficit, whilst decreasing, remained at 4.3 percent and 6.4 percent of GDP in 2011 and 2012, respectively. It is likely to be close to 6 percent again in 2013.

It is unclear how these numbers can be spun to reflect the positives of austerity or how they could somehow have constituted solace for bond markets. It is clear, however, that they are a result of deliberate choices by the current government, under the narrow margins set in place by the agreement with the Troika.

It is also clear that these choices will persist and are, in some cases, toughened in the government’s budget for 2014. Taxation will remain historically high, but for a small decrease in corporate tax. Public employees will continue to endure drops in real wages and pensioners will put up with further cuts. The incongruence between campaign discourse and political action is either a result of unpreparedness and incompetence or willful deception. The suffocation of the middle-class is unequivocal, though.

Amidst relentless social unrest – which in Portugal means, for the most part, tempered – the governing coalition went through a testing 2013. In April, key budgetary measures were deemed unconstitutional by the competent court; which in the meantime was made part of the political playing field by a combination of misguided internal statements and unacceptable foreign punditry. Two months later the finance minister resigned, tragicomically citing unforeseen effects of the austerity doctrine on the level of internal demand. An inexplicable crisis then ensued with the sudden resignation of Paulo Portas, minister of Foreign Affairs and leader of the junior coalition party, the rightists Christian Democrats.

In order to conceal the manifest inconsistency between a political career built on pleading for lower taxes and this government’s policies, Portas chose the seclusion of a contextually irrelevant, non-economic ministry. His resignation, in protest against the nomination for the finance position, culminated a couple of weeks later with the new nominee taking charge and him assuming the unheard position of deputy prime minister. Meanwhile, a lot of needless uncertainty was added to an already complex situation. This particular display of irresponsibility and amateurishness constituted the ultimate ebb in Portugal’s recent political history, yet it also revealed a widespread political culture unaccustomed to make sense of coalition governments.

This is but one of the aspects in which the current struggles bear the potential for an improved medium-term future. Judging by polls and public sentiment, there are signs that the next few governments will forcibly be made of more than one party, something that in the Portuguese’s short democratic history has been as rare as unsuccessful. This has, however, majorly contributed to the poor quality of the political debate. In the context of the Portuguese public sphere, coalition politics will constitute an invaluable opportunity to more transparently contrast political projects and choices, whilst lessening the nepotistic tendencies that have been associated with more than 30 years of alternative rule between the Socialists and the Social-Democrats.

Fuelled by the forced emigration of hundreds of thousands of qualified unemployed, the crisis has also brought increased awareness of the relative lack of competence in the ranks of political parties, when compared with other sectors of society. The performance of the current government has made clear that its power-grabbing motivations were more driven by an unquenchable thirst for control than by the existence of planned, calculated solutions to a situation of emergency. As this realization increasingly sinks in, the Portuguese – in particular the younger generations – are becoming more demanding, more informed and more critical in assessing the dynamics of its existing political system.

This will result in a more healthy relationship with the state. Further contributing to this prospect are, paradoxically, the cutbacks affecting most domains of state’s action. The role of the government in the Portuguese economy has always been significant and cannot solely be measured by the amount of government spending as a percentage of GDP (historically around 50 percent).

There are many companies, in all shapes and sizes, which have some form of the state – local, regional, or national – as their main or even sole customer. Recent developments have painfully made clear that being dependent on the whims of the State has clear and present drawbacks; not just the obvious advantages. This is motivating a business culture more inclined towards risk and competiveness and less leaning on the supposed stability provided by state procurement. In fact, the speed with each the country reversed its negative balance of payments in the last two years is not only reflective of predictable contraction in imports, but also a testament to the surprising merits of its export sector.

The short-term horizon, though, naturally looks bleak. The Troika’s assistance program is set to end in the summer of 2014 and it is, at best, doubtful that Portugal will assemble the conditions to a full return to bond markets by then. If those conditions are not met, it is at this point unclear what exact form renewed financial assistance will assume and, particularly, what it will entail in terms of further public finance belt-tightening.

Still, it is safe to predict that belts will not be very much loosened either. Moreover, provided that the government does not self-destruct before, elections are scheduled for 2015. Despite proclaimed stern opposition to the Troika-inspired government austerity policies, there has failed to emerge a credible political alternative in the left of centre ideological spectrum.

The Socialists – having presided the signing of the assistance program in the first place – are awkwardly trying to balance criticism with cluelessness. In this sense, the most pervasive issue currently facing Portuguese society is uncertainty, a huge chunk thereof not really under the control of the Portuguese and their national institutions. There is, nevertheless, enough discretion left for the government to act on their rhetoric of state reform and lead a national dialogue on long-term public finance strategy, as opposed to wasting all its communicative resources in short-term perception management.

Uncertainty won’t be fed, however, by calls for radical paths of action coming from the Portuguese themselves. Appeals to either massive debt restructuring or monetary union exit have failed to earnestly resonate. When compared to social protests in Greece and Spain, the Portuguese have shown remarkable moderation: a sign of a society more actively looking for solutions than condemnations. It might be too premature to claim that there is life beyond the budget. It is definitely too early to expect budgetary constraints to be lifted and economic policy to manifest much more than an accounting ethos.

This government brought this situation upon itself, though, by choosing to govern through the Troika’s natural obsession with ends. The Portuguese, in turn, will hope that the Troika’s reduced attention to means won’t permanently impair their chances for sustainable recovery. Thus far, they have proven resilient, a feature perhaps to be expected in a country thirty tears from celebrating its 900th anniversary.