Economics, Politics and Budgets: The Political Economy of Fiscal Consolidations in Europe
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In the Stability Programme projected a primary balance of 3. However, this is mainly due to a different estimate of the output gap —Commission services believe the current economic growth level in Portugal is well above potential growth—. In any case, this is by no measure a return to fiscal profligacy, and certainly not such that an expansionary fiscal stance could be driving the current recovery.
In Portugal left the recession behind and started a significant recovery in If we take recent history into account, the recovery has been encouraging. But it is not enough to ensure real convergence. The growth of the past couple of years, and forecast for the next, is more or less on par with that of Germany which determines to a significant extent that of the euro area , below what Spain posted and far below the pace of Slovakia, an example at the other end of Europe, of a similarly-sized economy.
On the other hand, Portugal is now in a better shape than Italy or Greece. Contrary to what had happened in the earlier stages of the recovery in Portugal, the current growth process is not contributing to any worsening of the external position.
World Economic Situation And Prospects: July 2018 Briefing, No. 116
Ideally, exports should grow faster than imports, but at least the strong growth in exports in and was not surpassed by imports, unlike the two previous years which saw a strong rise in private spending in durable consumption, possibly from delayed purchases. Importantly, however, the evolution of domestic demand conceals the fact that investment has recorded strong growth, much larger than consumption, in a pattern that is strikingly different from that which was seen in previous recent recovery stints in Portugal.
This investment is mostly in construction, although, despite an increase in lending to households for real-estate purposes, a large share of the construction surge is foreign investment and a marked rise in housing prices seems to be fuelled by that investment rather than overheated lending EC, b; 14 IMF, Significantly, Figure 9 above shows that the contribution of government spending to the growth in domestic demand has been very small.
In the current recovery process, the labour market has shown very positive developments. Unemployment rate projections have been constantly beaten since , meaning that the current dynamics of the labour market caught most observers by surprise. The effectiveness of labour market reforms in the adjustment programme partly explains this trend 15 and the surprising growth in the relatively labour-intensive tourism sector hotels and restaurants also accounts for a significant part of these results.
The very positive labour market developments are, however, somewhat misleading in the sense that their resilience may be questioned, as the jobs created are to a significant extent short-term, low-skilled and low-pay. This relates to one significant shortcoming of the current recovery: the strong dependence on a tourism boost of historic proportions. Hotel revenues and overnight stays are almost doubling the figures recorded during the crisis see Figure This is a welcome boost but the dependence and shifting of resources to this sector is a potential risk that makes the recovery more fragile.
Basing the reduction of the labour slack on these jobs might in itself prevent the development of skills and training in more technology-intensive, higher-skilled work that the Portuguese economy should aim to include to a greater extent. The dependence on tourism poses significant risks for the near term. For example, the British Foreign Office lifted its ban on travel to Tunisia in , which will certainly reduce the pace of growth in tourism coming from the UK, the country sending most visitors to Portugal in according to Bank of Portugal data.
To this must be added the NPLs that still make it challenging for the financial sector to provide funding to the real economy and for monetary policy to be properly transmitted. Portugal still has the third highest NPL ratio in the EU, second only to Cyprus and Greece, and well above the figures of Ireland and Italy, the other peripheral countries that faced great difficulties, with the banking sector in the former and anaemic growth in the latter.
However, doubts can remain as to whether some of the performing loans which are not in or near default can actually hide a more complex reality, with a legacy of firms in a difficult financial situation lacking good growth prospects. While improvements have been made in terms of legislation and public facilities in terms of facilitating bankruptcy processes and corporate restructuring, there is still work to be done in terms of improving judicial sector efficiency IMF, Legacy issues related to public and private debt are likely preventing larger growth eg, large fiscal surpluses prevent further public investment, while NPLs constrain corporate lending and represent risks to be considered in a context of a global slowdown.
Additionally, the goals of replacing old jobs with higher-skilled and technological-intensive jobs ara a work in progress and still deserve closer attention, as tourism still plays a significant role in reducing the labour slack. There is, however, an important note in favour of sustainablility: the return to the previous dynamics of consumption growing well above productivity and external deficits does not seem to be taking place.
While the Portuguese economy faces multiple predicaments in the current positive economic cycle, the recent standard of many consecutive quarters of high growth seems miraculous.
Is the political miracle of the parliamentary coalition behind such developments? The answer is as complex as unexpected. The first answer is no. From another perspective, taking into account the internal social and political context which also matters for the durability of this economic evolution , the answer can also be yes. The government was able to appease social unrest and use the economic tailwinds to improve some social indicators.
Teixeira for thoughtful comments. Bento , Euro forte, Euro fraco , Bnomics, Lisbon. Eichenbaum, S. Rodrigues, R. Ideally, we would look at the structural primary balance, which corrects the balance from cyclical effects and is the most appropriate measure of the fiscal consolidation effort. However, 1 there are significant theoretical and empirical issues pertaining to the estimation of the output gap and of structural expenditures, which are necessary to compute structural fiscal indicators; and 2 the Socialist Party platform did not provide such figures, preventing the comparison we want to draw here.
Summary Save for , the s were a lost decade for the Portuguese economy. Analysis 1 euro fragility and economic and financial crisis In the years after Portugal entered the EU along with Spain in , its economy succeeded in attaining real convergence with the European average. Figure 1.enter site
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Year-on-year quarterly real GDP growth in Portugal, Along with the extensive influx of structural and cohesion funds fuelling public investments over the period, this entailed a generalised euphoria with respect to the prospects for European integration and economic growth. Figure 3. The political miracle In October , with an already improving economy, the general elections brought along two big surprises. Constituencies in which right-wing parties lost most votes in the general election As shown in Figure 4, post-electoral studies indicate that the evolution of the economy led to a significant loss of support for right-wing parties in groups which perceived they had been particularly affected and unprotected by the crisis the young and unemployed or targeted by fiscal consolidation measures pensioners.
Figure 5. Budget balance forecasts, At the time, the Socialists advocated headline budget balance figures which should be Figure 6. Primary balance forecasts, However, the interpretation changes somewhat, though not completely, when looking at the primary balance, a slightly better measure of the fiscal consolidation effort undertaken by the economy.
A closer look at the recovery In Portugal left the recession behind and started a significant recovery in Figure 7. Figure 8. Figure 9. Figure Unemployment rate forecasts, In the current recovery process, the labour market has shown very positive developments.
- The impact of national fiscal rules on the stabilisation function of fiscal policy.
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