November 28, 2012 4:36 pm

Portuguese PM keeps faith with austerity

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Portugal’s 2013 austerity budget may pose risks to the debt-laden economy, but the government is determined to stick to the recovery plan agreed with its international creditors, according to Pedro Passos Coelho, prime minister.

In an interview with the Financial Times, the centre-right premier said: “No one is saying there are no risks ahead. Of course, we’re facing risks. What I’m saying is that we’re not in a deep recession. We’re not in a spiral of depression.”

Portugal GDP growth

Portugal GDP growth

Mr Passos Coelho’s ruling coalition received parliamentary approval on Tuesday for its budget, which includes steep rises in income tax and cuts in unemployment benefit.

The measures, introduced amid the harshest recession since Portugal emerged in 1974 from a rightwing dictatorship, are aimed at reducing the budget deficit to 4.5 per cent of economic output from an anticipated 5 per cent this year.

Their broader purpose is to reassure investors that Portugal will fulfil the terms of a €78bn financial rescue arranged last year with its European partners and the International Monetary Fund, with the aim of regaining access next year to sovereign bond markets.

Asked if Portugal faces the danger of descending into a Greek-style slump, Mr Passos Coelho replied: “Theoretically, it’s possible. But I believe we are adopting the necessary measures to avoid such a scenario . . . I’m not adopting more austerity measures than are needed to reach our targets.”

He said economists and domestic political critics who contend that Portugal should request more time to reach its deficit targets were “quite simply wrong”. Portugal’s creditors have already given his government permission to delay the goal of a 3 per cent deficit by one year to 2014.

“If I started saying I wanted to renegotiate the memorandum [the accord with Portugal’s creditors], I would be in a worse position, for sure. Look at the Greek process. When you say you’re asking for more time, you’re saying you want more money. That means a new [rescue] programme and I don’t want a new programme,” Mr Passos Coelho said.

Adhering to the European-IMF terms provided the guarantee that, if Portugal’s public finances and economy were to plunge into worse trouble than expected, the creditors would come to Portugal’s assistance, as they have promised.

“Why put at risk the whole process, saying, ‘we are not capable of sticking to the goals?’ It’s not a real alternative,” the premier said.

Far from diluting his policies, Mr Passos Coelho intends to present Portugal’s creditors in February with a two-year plan to save another €4bn in public expenditure

Giving the first public indications of where the savings might be made, he said cuts to overtime hours paid to state workers in the health service could eke out more than €100m. The government could save another €80m by reducing its bills to the pharmaceutical sector.

“What we must explain to people is that the welfare state may be put at risk if our unsustainable debt is not dealt with,” he said. The government forecasts Portugal’s public debt will peak at 122 per cent of economic output in 2014.

“If we want to preserve social cohesion and social policy, we must reduce the deficit and debt, reform the state administration and reduce some benefits that people receive. Social payments increased sharply over the past nine years. Simply, we made things unsustainable,” Mr Passos Coelho said.

However, he added that his government’s cuts would have no impact on 90 per cent of pensioners, and anyone with a monthly income of less than €600 would also be unaffected.

The risks attached to the austerity programme were highlighted by Portugal’s central bank this week in its autumn bulletin. “The continuously worsening cyclical position of the economy may have a negative impact on potential growth. This risk may be exemplified by a continuous reduction of the level of the capital stock, a depreciation of the human capital of unemployed workers and an emigration of qualified young people,” the bank said.

Portugal’s jobless rate is predicted to rise next year above 16 per cent of the workforce. But it is already approaching 40 per cent among young people, a level that is spurring thousands of talented young Portuguese men and women to pursue careers abroad.

The government is raising income taxes sharply partly because public anger forced it two months ago to withdraw a plan to stimulate business activity by reducing the social security burden on employers and recouping the costs from employees’ wages.

But Mr Passos Coelho said this outcry, and signs of mounting labour unrest, did not mean Portuguese society had lost patience with austerity. He cited a survey by the Pitagórica pollsters, published on Wednesday, which indicated that 63.5 per cent of respondents thought Portugal should keep to the terms of its European-IMF programme, agreed in May 2011.

“After one and a half years, the results in social terms are very tough. No one likes to be in recession. But people see what’s happening in other countries. They don’t want a political crisis and they don’t want the programme to fail,” the premier said.

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