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The Poster Child of Austerity is Lost

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By Delusional Economics, who is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

While we wait for tonight’s announcement from the German constitutional court, there are some interesting developments in the Troika’s latest review of Portugal:

The program remains broadly on track. In 2012, despite headwinds from abroad, real GDP growth remains in line with projections, exports are performing better than expected, and the fast reduction in the external deficit is contributing to alleviating the external financing constraint. Nevertheless, higher unemployment, lower disposable incomes, and a shift in tax bases away from more highly-taxed activities are weighing on revenue collection. Against this backdrop, policy choices need to strike a balance between advancing the required fiscal adjustment and avoiding undue strains on the economy. Swift progress on structural reforms remains key to put the economy on a sustainable growth path. Maintaining broad political and social support for the revised adjustment program will also be important.

Growth will remain weak into 2013. In 2012, economic activity is projected to decline by 3 percent. Reflecting weaker import growth in euro area trading partners and additional budget consolidation measures, GDP growth is now expected to turn positive only in the second quarter of next year, resulting in a projected GDP decline by 1 percent for the year as a whole.

The fiscal deficit path has been adjusted, particularly for 2013. While spending in 2012 performs somewhat better than budgeted, revenues are lagging significantly behind budget plans. To allow partial operation of automatic fiscal stabilizers, the deficit targets were revised upward to 5 percent of GDP in 2012 and from 3 percent to 4.5 percent in 2013. The 2014 deficit target, at 2.5 per cent of GDP, remains below the threshold of the Stability and Growth Pact of 3 percent. This revised path will allow the government to design and implement structurally sound fiscal measures, while easing the short-term economic and social cost of fiscal adjustment.

But reaching the new deficit targets will require additional consolidation efforts. Agreement was reached on a range of permanent spending and revenue measures to underpin the deficit target in 2013, which also make up for the one-off measures in 2012. Continued efforts to strengthen public financial management, bolster tax compliance, reduce losses of state enterprises, bring down the costs of public-private partnerships, and streamline public administration will also contribute to the needed fiscal adjustment. As part of the measures to compensate for the Constitutional Court decision on the public wage and pension cuts, the government also plans to lower employers’ social security contributions, a measure that will improve competitiveness and support employment. Steps will be taken to soften the adverse impact on low-income workers.

So even Portugal, the “poster child” of austerity, is failing in its attempts to meet budget goals imposed under a 78-billion-euro bailout deal. The country has been granted an extra year and targets have been revised down due to the recession that is now engulfing the Eurozone. The Troika now expects a government deficit of 5% this year and 4.5% in 2013, up from 2.5% and 3% respectively.

Portugal’s economy shrank by 1.2% in Q2 and 3.3% yoy, mostly attributed to a decline in internal demand of 7.6% and collapsing investment, down 18.7%. Household consumption fell 6.0% while government spending fell 3.9%. The plan to internally devaluae and become export driven is having some success with exports up 4.3% in Q2, but this is nearly half of the growth that came in Q1 and, as the IMF stated above, import growth in euro area trading partners and additional budget consolidation measures are likely to sink this going forward. In other words, everyone is trying the same trick.

Like France, there is now some expectation of growth to return in 2013, but I have no idea why. Possibly on the expectation of some form of global stimulus, although it is may just be a date far enough in the future that people won’t challenge it.

In the meantime, as with Spain, when things look bad it’s time to double down:

Prime Minister Pedro Passos Coelho said he would cut public employees’ salaries, requires that all workers to pay more for social security, and raise taxes on the rich—the latest belt-tightening steps aimed at meeting Portugal’s obligations under an international bailout program.

Mr. Passos Coelho made the announcement on television late Friday as viewers were absorbed by a World Cup qualifying match between Portugal and Luxembourg that was to start minutes later. He cast the measures, effective next year, as an attack on the country’s 15% unemployment rate, which has been rising as a result of previous cuts in public spending.

Employees will be required to pay 18% of their salaries to social security, up from 11%, allowing companies to cut their contributions from 23.75% to 18%. “We will reduce substantially the costs of labor, providing incentives to investment and job creation,” the Portuguese leader said.

Public workers will lose one paycheck out of the 14 they receive each year. Mr. Passos Coelho had scrapped an attempt to cut two months’ salary after a court ruled in July that it discriminated against public employees. His speech Friday offered no legal rationale for the more modest cut.

Given the country has just been granted another year in order to meet targets they will require additional funding to do so. Under normal circumstances, as we’ve seen with Greece, you would expect this to mean a re-negotiation of not just the length of time, but also the amount of the support program. Even though the economy is in a worse state than otherwise expected by the authorities, Portugal is still expected to return to the private markets in September 2013. That all suggests to me that the Portuguese government will be attempting to hide under the umbrella of the ECB’s new Outright Monetary Transactions (OMT) program when it does make its return to the markets.

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19 comments

  1. Hugh

    The program remains broadly on track???? To do what exactly? Reduce the populace to serfdom? Growth remains negative and they are only hoping it will turn marginally positive next year. Revenues are lagging. So more consolidation aka austerity aka class warfare will be needed. Workers’ taxes will be raised 7% and corporate taxes will be lowered 5.75%. And public employees get a 7% cut in their wages. It is not clear if they also will be hit with the tax increase.

    So basically what the government is doing here is pursuing a policy of supply side economics while contracting demand. This is plain and simply criminal.

    1. Joe

      One of the problems which government faces is that it is playing against the hedge fonds. There is an obvious conflict of interest between being fair and transparent to constituents and trying to reduce financial costs, by deceiving financial players. Sad, that it’s come to this, but such is life.

      At worst, governments are complicit, but the financial industry is the source of the criminal enterprise which is destroying our economies.

      Taxation needs to be completely rethought. Perhaps even such radical solutions as basing taxation explicitly on a multiple of median income needs to be considered. Multiples of four times median income are taxed at 100%, for example, would in effect express the value of maximum income earners in terms of a time period and not simply an arbitrary (aka. market) value. Income afterall, should be in some proportion to the life of the person earning it. In any case we need a system which is going to stimulate participation in society and trickle down economics has been an abject failure.

      1. Derek R

        If you’re going suggest radical tax reform, then it has to be replacement of most other taxes by a 100% Site Rental Tax (aka Land Value Tax) plus a Citizen’s Dividend to rebate it for everyone owning less than the median amount. It’s easy to understand, cheap to implement, impossible to evade, and gives a major boost to productive economic activity.

        1. Carol Sterritt

          Since you claim this idea is easy to understand, could you explain it enough so we could understand it? 100% site what-sie for starters. Never heard the expression you use.

  2. Jose Guilherme

    “That all suggests to me that the Portuguese government will be attempting to hide under the umbrella of the ECB’s new Outright Monetary Transactions (OMT) program when it does make its return to the markets”.

    Exactly! This seems to be the plan: Portugal will likely leave the stranglehold of the Troika in order to submit to the diktat of the ECB. Meaning, a few extra years of austerity after 2013.

    Also, the latest figures put the inflation rate at 3.1%. If we add the 7% plus paycut just announced fir private sector salaries we get a real decrease of purchasing power in the order of more than 10% in 2013. This implies the Portuguese recession is bound to get worse. Up to now, post-austerity GDP has already shrunk by more than 6%.

    If this is the poster child of austerity, the Spaniards can expect a rough ride indeed.

    As for Italy the advice could be: stay tuned and get ready for the worst if or when the Troika arrives in Rome.

    1. Shyster Sister

      Was that a Republican or Democratic demonstrator? Just wondering because the prior photo in the stream is clearly not a Democrat.

      Anyhoo, anybody else thinks it’s orwellian doublespeak when the report says real GDP growth is in line with projections and then it turns out to be a contraction (3% no less!). This is growth???

  3. YesMaybe

    Wait, I thought Ireland was the poster-child of austerity, Don’t get me wrong, I think the austerity is a plutocratic scam, but let’s get out poster-children right.

    1. Jim

      “The beatings will continue” until democracy is restored in the Continent of Europe.

      So many “progressives” lament austerity, but have yet to offer an option that does not violate German sovereigny and democracy.

      The ECB can’t transfer funds from the North to the South, as it’s currently doing. It’s mandate prevents it from doing so.

      For a progressive to support the ECB’s current debt monetization plan is akin to supporting Bernanke’s Fed in similar circumstances.

      Let’s say that the upcoming election is a stalemate, and divided government persists.

      Would you also support Bernanke crafting and imposing fiscal policy from the Fed, because “the country is about to implode”.

      Well, that’s precisely what Draghi is arguing. And what so many of you are buying, regrettably.

      And at least the Fed is part of the US of A. There is no US of E.

      1. Calgacus

        The ECB can’t transfer funds from the North to the South, as it’s currently doing. It’s mandate prevents it from doing so.

        Jim, no MMTer proposes transferring funds from Germany to Greece. The ECB’s mandate is gibberish. The treaties make no sense, being based on “economics” which makes no sense. TINA is literally true. There is literally no alternative, not even one. The Euro rules are impossible to follow. Therefore IF you are to have a Eurozone, there is no reason not to run it rationally, not as a doomsday machine.

        The Germans haven’t pulled out yet (unfortunately), so have acquiesced. There’s been plenty of Euro-printing already, with the psychotic condition of austerity, which makes everything worse. All sane economics, MMT says is do the same as being done already, without the psychotic condition. Yes, “austerity” – once employment is pushed to zero across the Eurozone, by “austere” penny-pinching spending for employment. Not before.

        So many “progressives” lament austerity, but have yet to offer an option that does not violate German sovereignty and democracy. An ECB-”funded” Eurozone-wide Job Guarantee would not violate German sovereignty or democracy. The democratic powers of the German legislature do not extend to making 2 + 2 = 5, no matter how much they want it to be 5, and have been brainwashed into believing it to be 5.

        Since printing the Euros out of thin air for a JG, not taking them from Germany, would not be inflationary, contrary to nonsensical quackonomics, and would be an strong currency stabilizer, it falls under the ECB’s currency-stabilization anti-inflationary mandate. For with a sufficiently low wage it would decrease inflation. The natural tendency of modern monetary economies is toward deflation. It takes a lot of hard work & stupidity to fight it. What on Earth would Germans have to complain about if they had more, and more valuable Euros?

        For a progressive to support the ECB’s current debt monetization plan is akin to supporting Bernanke’s Fed in similar circumstances.

        Bernanke’s Fed doesn’t & can’t monetize US debt. US debt, like that of any normal state, is already monetized, and the monetization of US debt is multiply protected & enforced by the Constitution.

        Yes, today’s Eurozone is “a colossal mistake that protects the top 0.1% at the expense of the 99.9%.”

  4. Rui Azevedo

    The Euro Crisis Explained To Grannies: For a very simple (and funny) explanation for the euro crisis, just write on your search engine: wordpress blog The euro crisis explained to grannies

  5. ShMagus

    So the Austerity beatstick is ineffective at improving morale – big surprise there.

    Has anyone done a compare and contrast of the Euro Crisis and what’s going on in South America with economies turning inward and seeing growth?

    1. Jim

      You’re absolutely correct.

      Unfortunately, too many “progressives” are so wedded to this ill-fated EuroZone that they favor austerity over a return to the nation state.

      They are so intellectualy invested in the EuroZone that they fail to realize it’s a colossal mistake that protects the top 0.1% at the expense of the 99.9%.

      1. Roland

        + 1

        If today’s Eurozone ails, progressives should merely shrug and walk away.

        European unity, like world unity, is a strong trend of this age, but there are different ways to do it. The way we’re doing it now is pretty much all wrong.

  6. Patricka

    Portugal is suffering badly under the yoke of the austerity which has been applied to her. As to the official statements above they always claim that it is just about to turn a corner! Just like Greece was supposed too…

    As to her actual situation it was summed up well here.

    “What has driven this?

    This part is simple, it is the decline in Portugal’s economy which has contracted by 3.3% over the last twelve months and by 1.2% over the last three months. We see here that austerity applied to a weakening economy has led to yet another turn of the austerity wheel which will beget more economic weakness and probably repeat. The clearest signal of this is in Value Added Tax (sales tax) revenues which in spite of increases in the rate at which it is being applied has fallen by 1.1% in the year to July.”

    So what is actually likely to happen next?

    “This leaves us with the problem of 2013 starting from such a bad base. If we add in that 2012 benefitted from a one-off move we see the scale of the problem. The sugar soaped reviews so far have seen such issues swept under the carpet and in addition to this they will have to face the prospect of Portugal’s economy contracting in 2013 too. If they apply the same formula to Portugal as they did to Greece then she will continue to spiral downwards and 2013 will be as bad as 2012.”
    http://www.mindfulmoney.co.uk/wp/shaun-richards/portugals-government-presses-the-economic-self-destruct-button/

    I guess that the report in 2013 from the troika will say that 2013 is “unexpectedly” worse and that 2014 will be better…..

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