Will I have to eat my words as PEC 7 has arrived?

The new government, PSD, has so far been a bit of a disappointment.  Frankly, the first measures were slow to be announced and they were all about extra taxes.

The troika, IMF, The EU and ECB, had made an agreement with Portugal: "The Economic Adjustment Programme for Portugal" in May 2011 with the previous government.  It is a rather large document that in very abbreviated terms promises the aid Portugal previously asked for in return for concessions in the form of strong measures:

1. structural reforms to boost potential growth, create jobs, and improve competitiveness
2. a fiscal consolidation strategy, supported by structural fiscal measures and better fiscal control over public-private-partnerships and state-owned enterprises, aimed at putting the gross public debt-to-GDP ratio on a firm downward path in the medium term and reducing the deficit below 3 % of GDP by 2013
3. a financial sector strategy based on recapitalisation and deleveraging, with efforts to safeguard the financial sector against disorderly deleveraging through market based mechanisms supported by backstop facilities.

The key words in 1) structural reforms, is the very essence of what is necessary in Portugal.  If you read the document, you will find the criteria that Portugal must get to 2) by finding one third of the money by increases in receipts (e.g.taxes) and two thirds by cutting expenses.

But please do notice the:  "...to boost potential growth, create jobs, and improve competitiveness". 


In fact, the agreement is surprisingly detailed and gives little room for manoevre for any government.  The new PSD government reasonably spent some time after taking over to look at the situation.  Unsurprisingly, the deficit was larger than thought and new very large amounts of hidden debt kept popping up.  To the point where Portugal in a review already had to be warned...

Then the government presented the first measures. New taxes.  They were rapidly criticized for nearly only working within the usual area of increasing income. Absurdly some of the criticism came from the previous government party, now the opposition: PS. However, I found the criticism had a point.  Here are the first measures, I call PEC 5 (*):

• 50% tax surcharge on Christmas bonuses
• rise of VAT in gas and electricity
• increase in public transport fares
• increase in income tax  for individuals with higher earnings.
• increase in corporation tax for businesses with higher earnings.
• cuts in spending on health sector
• cuts in spending on education sector

All this without removing/changing any of the previous government's austerity measures:  PEC 1, PEC 2 and PEC 3.

PEC 6 was presented recently and finally for the first time public expense are planned to be cut for real, but again also some new taxes:

• Increase of some lower VAT rates to 23%.  The most polemic being food services such as restaurants and cultural events such as concerts going from 13% to 23%
• Increases in personal tax by decreasing deductions and removing deductions entirely from people who earn well
• Loss of both 13th and 14th salaries for public employees and retirees earning above 1000 euros
• More measures against tax evasion
• Tax evasion fines will rise by 50%
• Some national holidays will be cancelled (4-5)
• Employees in the private sector will have to work half an hour extra every day with no extra remuneration

As far as I understand, the measures are to last two years.  Update:  Only the loss of the 13th and 14th salary is explicitly stated temporary by the prime minister.  He does say it might be three years.  He also says that 12 salaries per year might be the right to aim for.  I say:   He is a politician.  How often does a government lower a tax or fee?  Why should there be more money in the state vault anytime the next 10 years?  This financial crisis may last a while...

Unfortunately, no permanent solutions, no structural change.  A bit like peeing in your pants to keep warm.  Only the two last measures will have some small impact on improving conditions for private enterprise.  All the rest will in principle have as its main effect that the economy will retract even more.  PEC 5 and PEC 6 are therefore largely considered to be solely for the purpose of meeting the deficit demands.

Organic laws approved by ministers, Thursday

But today, at last, some good news, PEC 7?, if the measures are implemented.  I will see it before I believe it, but then I may have to eat some of my words.  Amazing real structural change it seems:

146 public entities will be abolished (from 359 to 213) and 290 high level managers will become superfluous (from 715 to 425).  Also the number of intermediate managers will be diminished.


This is epic and finally seems to be a real effort of cutting fat and restructuring the public sector to become more lean and efficient, to combat the bureaucracy.  If this goes through and the cuts are rational - I applaud.

Let us see.

(*) PEC means Programa de Estabilidade e Crescimento - Program for stability and growth, e.i. austerity measures in a package. PEC 4 was never implemented (the previous government fell on PEC 4.  After four packages in one year and three promises of each being the last one...). PEC 5, 6, 7 are terms invented by me.  The current government does not give them these names.  PEC 6 is in fact the proposal for OE 2012 (state budget 2012)