Portugal did not have an economic binge on the scale of Greece or Spain; but it is still nursing a hangover. Its worsening fiscal position has been attracting hostile attention from bond vigilantes. With public debt now more than 80 per cent of national output, the minority government of Jose Socrates is trying to drum up the opposition support needed to pass an austere budget aimed at cutting the deficit from 9.4 per cent of gross domestic product in 2009 to 4.6 per cent in 2011.
This is not an ideal measure, but Portugal has few attractive options. Lisbon is at least cutting spending rather than hiking taxes to close the deficit. Most of the measures make sense. Proposed public sector wage cuts are overdue. The postponement of large infrastructure projects is inevitable. While this will hurt, Portugal cannot dodge such steps if it is to avoid losing its fiscal freedom entirely: despite promises of retrenchment, the deficit actually rose in the first nine months of the year.
The other reason to pass the bill is that the government will resign if it does not pass. Portugal’s constitution does not allow parliamentary elections in the six months before a presidential election. One is due in January. If the government fell now, an election could not be held until the new year. The ensuing deadlock would send bond investors fleeing for the Serra da Estrela. That is an excursion Portugal can ill afford.
Even if the budget passes, it will not solve Portugal’s debt problems. Shedding these will be difficult without nominal growth. Yet Portugal’s is anaemic. Boosting it would require either a depreciation in the value of the euro, or a massive increase in productivity. Neither is likely. In fact, the austerity measures will probably push the economy back into recession in 2011.
The government’s programme will, however, buy time. It should use this to begin the structural reforms the economy badly needs. Portugal’s workers are among the most protected in Europe; its lumbering judicial system is an expensive drag on business; and its tertiary education system is weak. Portugal is a world leader in green energy. Beyond this, however, it produces few things for which there is high global demand.
The new European Financial Stability Fundat least gives Portugal a safety net if all else fails. Lisbon needs to hasten its reforms to avoid tumbling into it. Passing this imperfect budget would be a start.