1
Faculty of Humanities
Master Thesis
A new third way. How Portugal has presented a credible
alternative to fiscal expansion and austerity.
Ivan Hartsema
Registration number: s1429159
Supervisor: dr. J.D. London
2 Abstract
Since the euro debt crisis, a polarized debate erupted with regards to which policy measures should be taken in order to rein in excessive public debt figures and regain economic growth during a crisis. This debate holds two sides, proponents and opponents of austerity measures. Within this context, both sides of the debate have taken Portugal’s remarkable economic recovery as a prime example of their rational. Through an analysis of policy changes that occurred between the Passos-Coelho and Antonio Costa this thesis proposes that the line of policy that the Costa government implemented suggests a nuanced version of both sides. The policies of the Costa government adhere to fiscal discipline, whilst implementing policies that protect the most vulnerable, suggesting a third way between austerity and fiscal expansion.
3
1. Table of Contents
1. Table of Contents ... 3
INTRODUCTION ... 4
1. AUSTERITY VS FISCAL EXPANSION ... 5
2. THE CONTESTED CASE OF PORTUGAL, 2008-2020 ... 6
Portugal in the crisis ... 6
Modern Day Keynesians: Fiscal Expansion ... 8
Bocconi Boys: Expansionary Austerity ... 10
Conceptualization of Austerity ... 12
Portugal as the anti-austerity case by Modern Keynesians ... 13
Crisis as a window of opportunity to implement policies ... 16
Austerity in Portugal: a case of window of opportunity? ... 17
3. METHODOLOGICAL AND ANALYTIC FRAMEWORK ... 19
Quantitative framework ... 20
Qualitative Framework ... 21
4. THE CASE FOR AUSTERITY: AN EXPENDITURE APPROACH ... 24
5. PORTUGAL AS AN INSTANCE OF SUCCESSFUL ANTI-AUSTERITY... 32
6. WHO IS RESPONSIBLE FOR PORTUGAL’S ECONOMIC REVIVAL? ... 36
A successful case of (anti) Austerity? ... 36
Implications for future policy ... 37
4
INTRODUCTION
Recent theoretical and policy literature in economics reflects divergent perspectives on the merits and demerits of austerity policies as a strategy for managing and overcoming recessions and public indebtedness. These debates have been particularly salient in the European context, not only with respect to Greece, but in other economies, from Italy, to Spain, to Portugal. While questions about the appropriate role of the state and state austerity policies in Europe’s economies are nothing new and while features of the debate in the Greek context are well known, debates on state policy and austerity in the Portuguese context reflect an intriguing twist. In the Portuguese context, proponents of austerity have claimed the country’s recent economic boom to be the result of the adoption of austerity measures; whereas critics allege the country’s recent economic boom to have been the result of the rejection of such measures. Austerians have argued that much of the current growth is the legacy of though reforms pushed under the Passos-Coelho government, which led to enhanced confidence of the markets. According to the Austerians, an increase in the market’s confidence in Portugal’s fiscal sustainability has spread to the rest of the economy, ultimately improving household’s outlook of the future. Whether the Costa government actually represents an exemplary case of rejecting austerity has strong policy and theoretical implications, as both sides of the argument are busy pushing their rhetoric in policy spheres, such as the ECB and IMF. Others disagree.
Portugal has been hailed as a crucial case of successful austerity by austerians as a crucial case of successful anti-austerity by Keynesian scholars. After four years of austerity under the Passos-Coelho administration in combination with Troika supervision, an anti-austerity government under the leadership of Antonio Costa governed for four years. Under the Costa government Portugal regained economic impulse, increasing output and sharply decreasing unemployment and poverty levels. These developments, combined with Costa’s election rhetoric to overthrow what was left of any austerity policies, have led to several articles and journalists arguing that Portugal should be seen as an exemplary case of how to overthrow austerity and regain growth. According to them, the rejection of austerity measures has led to an increase in household income, which on its part has generated increased demand and output. A greater understanding of the case of Portugal will help clarify the debate between those that support and oppose austerity, whilst providing a more nuanced explanation for Portugal’s recent economic growth and recovery. If left unacknowledged, the case of Portugal will fail to bring a crucial nuance to the polarized debate of fiscal responsibility within Europe.
Addressing the Portuguese case in a comparative policy context, this thesis considers whether Portugal’s recent economic policies can be understood as austerity or anti-austerity and addresses the puzzling question of whether, how, and why policies variously understood as austerity or anti-austerity in nature may have facilitated economic recovery. While every country is specific and while Portugal’s economy is relatively small, the thesis uses the country’s experiences and the debates it has sparked to speak to broader theoretical and policy debates about the conditions under which austerity may assist or hamper economic recovery.
5
Employing a mixed methods research design that incorporates both qualitative and quantitative analysis, this thesis assesses the significance of Portugal’s experience asking whether and how it can be understood as anti-austerity and the implications of this for academic and policy debates. The thesis is organized as follows: the first section addresses recent developments in an old debate – on austerity. The second introduces the case of Portugal and the problems it raises. The third provides an overview of the methodological framework in which both the qualitative as quantitative methods are reviewed. The fourth and fifth section carry out the quantitative and qualitative method respectively, forming the analysis of the thesis. Lastly, the sixth section brings the results of the analyses back into perspective by inferring whether the Portuguese case can be seen as anti-austerity, its implications and the limitation of this research.
1. AUSTERITY VS FISCAL EXPANSION
In 2008, Olivier Blanchard, published a paper called The State of Macro in the world’s most renowned economics journal; The National Bureau of Economic Research (NBER). A prominent economist at the Massachusetts Institute of Technology, Blanchard is most widely known for his contributions during his tenure at the IMF, between 2008 up until 2015. In the State of Macro Blanchard seeks to provide an overview of the field of study of economics since the 1970s. Blanchard argues that an explosion occurred in the economic departments in the 1970s, as predictions made by the Keynesian school of economics were proven wildly incorrect. Four decades ensued in which three groups of economists; neo-classicals, new-Keynesians and new-growth theorists sought to determine which features of the Keynesian Revolution could be salvaged in order to build further upon. Blanchard further argues that although these three groups have had their own conflicts with regards to what extent of Keynesian economic thinking was still of use, a consensus emerged among economic scholars that Keynesian economic theory did not stand the test empirical data.
Blanchard’s paper was published in 2009, when the global economy was confronted with one of its most severe financial shocks since the Great Depression in the 1930s. Economies throughout the world were confronted with recessions, leading to budget deficits and increases in government debt figures. Accordingly, a debate erupted with regards to which policies were best to be pursued in order to restore economic and financial health. In line with Blanchard’s aforementioned consensus a strong push against anticyclical policies was certainly prominent throughout Europe, as economists stressed that more government spending would do more harm than good. The consensus led to the rational that in order to restore financial and economic stability government spending had to be tamed in order to minimalize debt and deficit levels. The austerity measures imposed by the Troika on Greece, Ireland and Portugal have led to severe debate among economists regarding the desirability to impose austerity on countries already facing severe debt and deficit issues. Ironically, the consensus which had been preserved for over three decades since the demise of the Keynesian school shattered quickly after the publishing of Blanchard’s paper. The most prominent debate that erupted in response
6
to the 2008 Global Financial Crisis (GFC) and the euro debt crisis that ensued, is whether governments are better off by following anticyclical policies, often proposed by Keynesian economists, or whether austerity measures should be applied in order to spur confidence among business and investors. It does not come as a surprise that when Portugal instilled a new left-wing anti-austerity-oriented government under Antonio Costa the results of his policies were of utmost importance for both sides of the debate. For those in favour of austerity as a policy to tackle excessive debt, also called the austerians, Mr Costa’s accession meant that debt and deficit would further increase, ultimately undermining the reforms carried out by previous governments under supervision of the Troika. For those scholars in support of fiscal expansion, the new government meant a greater likelihood of policies of their preference. Accordingly, the transition from a government that pushed austerity measures towards one reluctant regarding the reforms posed as an important battle ground of two opposing ideologies.
According to the European Commission (EC), Portugal’s estimated GDP growth stands at 1.7 percent both over 2019 and 2020, which is a one decimal point greater growth rate than the euro area average of 1.6 percent. Furthermore, its fiscal deficits have seen enormous progress, reducing a 11.2 percent deficit over 2010 to a 0.5 percent deficit in 2018. Unemployment peaked at a staggering 17.5 percent in 2013, only to decline to its lowest point since 2004 in June 2019 at 6.7 percent. Such extraordinary improvement in economic circumstances has attracted both austerians and anti-austerians to incorporate Portugal as their success story. Anti austerians have taken Portugal’s performance as repudiation of the austerity measures undertaken throughout the euro area during the crisis. Furthermore, scholars that pledged allegiance to the Keynesian school saw the supposed failure of austerity in Europe as vindication for the consensus that had persisted the last decades with regards to anticyclical policies.
2. THE CONTESTED CASE OF PORTUGAL, 2008-2020
The next section aims at incorporating the case of Portugal within the debate between proponents and opponents of austerity. Whilst doing so, the separate sub sections aim at underlining the importance of Portugal as case within the debate. Within the first sub section an overview will be provided of Portugal’s case during and in direct response to the crisis. The ensuing sections will provide an overview of the existing debates within the literature regarding austerity and ultimately relate the case of Portugal to the literature of both Austerians and Keynesians.
Portugal in the crisis
The central fear of policymakers throughout the Eurozone during the euro debt crisis was the spread of what was originally seen as an isolated Greek problem, with regards to its unsustainable public finances, to other Member States. Shortly after the eruption of the Greek debt crisis in the first quarter of 2010, fear erupted among investors that the Greek crisis might well spread to Portugal, one of the PIGS countries. In light of these fears, PM Jose Socrates, of
7
the PS (Socialist Party: centre-left), underlined that austerity measures imposed in collaboration with the EC would prevent the necessity for a bailout as seen in the Greek case. Despite the intention to secure investors’ support for the future of the Portuguese economy, central government faced a 11.2 percent budget deficit over 2010, drastically increasing its debt levels. As a result, several credit rating agencies ended up downgrading Portugal’s debt status in 2010, further undermining the sustainability of Portugal’s public finance.
In the first quarter of 2011, as social unrest regarding the austerity measures being imposed increased, Portugal’s parliament rejected Socrates’ last austerity package. Accordingly, the socialist PM resigned and Portugal became the third country after Greece and Ireland to apply for European Union’s (EU) financial assistance in order to tackle its excessive deficit and debt levels. In the month prior to the national parliamentary election the Troika, a combination of the EMU, EC and the International Monetary Fund (IMF), proposed a €78 billion bailout package on the condition of sweeping reforms in order to reign in the excessive debt and deficit levels. In the following elections of June 2011 Socrates’ party was punished with a 9 percent point loss, which led to a right-wing coalition composed of the PSD (Social and Democratic party: centre right) and the CDS-PP (Social and Democratic party: right) under the leadership of Pedro Passos Coelho. Combined these centre-right parties achieved absolute majority and sought to implement austerity conditions, allegedly instilled by the Troika.
The following years were symbolized by austerity measures which consisted largely by spending cuts in order to reign in public expenditure. Accordingly, the centre right government privatised utilities, decreased public-sector wage costs, increased tax on consumption and increased flexibility among labour laws. Several of these policies were confronted with heavy social upheaval, as it led to several protests and the break-up of the two largest unions (CGTP & UGT) in a dispute regarding labour law reforms. These reforms led to the decrease of annual government expenditure by 3.5 and 3.1 percent of GDP for 2011 and 2012 respectively, whilst actually increasing it by 3.1 and 3.8 percent of GDP for 2013 and 2014 respectively. The strong increase in expenditure over 2014 is likely to be attributed to the government bailout of Portugal’s largest private bank Banco Espirito Santo, which added €3.9 billion to its expenditure.
The 2015 parliamentary election results were inconclusive, leading to the creation of a centre-left government led by Antonio Costa (SP) in an unusual alliance with the communist and radical-left parties, which had been excluded from government ever since 1974. The left-wing coalition promised to alleviate some austerity measures, whilst reigning in deficit and debt to the European norm. In the following years Costa raised the minimum wage, public salaries, pensions and reinstated the vacation days to a similar amount as prior to Portugal’s bailout. The economy was further stimulated by subsidies for development and midsize companies and tax credits. Although Costa certainly incorporated a view similar to that of the modern-day Keynesians, one of fiscally stimulating a country out of a recession, little research has actually been done one whether his government “spent their way out of a recession”, as Keynesians would like to see.
8
Data on Portugal’s deficit indicates that the government will run a mere 0.5 percent deficit in 2018, whilst achieving a surplus in 2020, a year prior to schedule. Although small deficits hardly form clear evidence against fiscal expansion, other indicators, such as expenditure and revenue have yet confirmed any fiscal expansion under Costa’s government. Accordingly, it remains the question whether Costa’s centre-left government actually rejected austerity measures in order to enforce fiscal expansion. Whether the Costa government actually rejected austerity measures, in line with his anti-austerity rhetoric, forms a gap in the literature, as journalists and scholars have often taken the government’s rhetoric to correctly represent policy. This research aspires to fill this gap by providing an analysis of the policy changes that occurred under the Costa government, and their impact on public finance. Most specifically, this research focuses on whether Portugal, under Costa’s government, symbolizes a clear case against austerity as is often portrayed in economic journals.
Whether the Costa government rejected austerity is not only relevant for a greater understanding of the Portuguese case. A better insight on whether Costa rejected austerity will directly affect the policy debate, as both Austerians and Keynesians seek to attribute Portugal’s economic revival to their ideology. The sources of Portugal’s economic boom matter for future policy and theory of how to deal with such large-scale recessions. The case of Portugal poses some difficulties for our current understanding of austerity as it represents a case in which a government is improving its fiscal position, whilst also advocating against austerity. This research hopes to clarify in which regards Portugal poses as a case of anti-austerity and thus contribute to the literature on the roots of its economic revival. Accordingly, the central research question of this paper is whether Portugal is an instance of successful (anti) austerity?
Modern Day Keynesians: Fiscal Expansion
Since the idea of European unification was formulated it provided the room for divergent political and economic ideological vision to be projected on a canvas. These divergent visions have ranged from Hayek’s free-market ‘inter-state federalism’ to a notion of ‘social Europe’ from labour parties (Helgadóttir, 2016). The following paragraphs will lay out the current debate of ideas regarding governments’ role in tackling economic crises. Furthermore, it will help conceptualize austerity which will lay the basis for our analysis of austerity in Portugal. Those economists which are in favour of enhanced government spending, or in other words, the lack of government spending cuts, as a response to financial malaise, incorporate a vision often derived from the Keynesian Revolution. Keynes’ 1936 General Theory of Employment, Interest and Money argues that public spending plays a crucial role in the formation of aggregate demand. According to general Keynesian theory aggregate demand is formed by multiple autonomous expenditures, of which investment and public spending also partake in. Moreover, the reduction of public spending should lead to a decrease in aggregate demand which may be several times the initial spending cut. This largely due to what Keynes coined the multiplier effect, which according to his book may take a value between five and ten. Put in other words, a decrease in public spending of €100 million by a certain government may
9
actually have an offsetting impact of somewhere between €500 and €1000 million on aggregate demand.
It is based on these Keynesian assumptions that the likes of Lord Skidelsky and Martin Wolf of the Financial times and Paul Krugman of the New York Times argue in line with anti-cyclical fiscal policies in times of economic distress. These modern-day Keynesians have gained popularity since austerity measures have been applied in response to the GFC and euro debt crisis. Scholars have attributed the blame for disappointing social (decreasing size of the welfare state) and economic (depressed growth rates) results in Europe to austerity measures (Matthijs & McNamara, 2015). In light of the decreasing size of the welfare state, Krugman (2012) argued in favour of overthrowing austerity measures imposed in Europe: “We don’t need to be suffering so much pain and destroying so many lives. Moreover, we could end this depression both more easily and more quickly than any imagines”. In the same article Krugman argues that the slow growth of the British economy in 2012, and the fears of a double dip (a second recession whilst the economy found itself in a fragile state of regaining growth), formed the strongest demonstration of how Austerians had it wrong all along. Furthermore, these modern-day proponents of Keynesian policies seek to replace austerity policies by enhanced public spending: “A burst of federal spending is what ended the Great Depression (…) and we desperately need something similar today” (Krugman, 2012).
Accordingly, these scholars argue in favour of government spending in order to boost the economy, whilst disregarding the consequences for public debt levels and budget deficits. Martin Wolf, a prominent writer at the Financial Times, argued against David Cameron’s notion that there did not exist a magic money tree through the argument that the Bank of England could simply create money at little to no cost for the public (Wolf, 2013). This argument is supported by the claim that the Bank of England did exactly so by printing 375 billion pounds in order to finance asset purchasing programmes. As a sovereign, governments are able to borrow money as long as lenders deem the borrower’s pledge to repay the outstanding loans. The British case, which is of utmost interest for both Wolf and Skidelsky, as it represents their nation of birth,
10
indeed portrays the case of a sovereign which had little increase in its bond yields in response to its increasing public debt and deficit. Accordingly, the three authors incorporate the case of Britain to represent how supposedly a sovereign is able to create and borrow money at little to none cost for society. As Portugal has transferred the responsibility to print money to the ECB when it became a euro area signatory, printing money was ruled out for Portugal. Accordingly, as per Wolf’s and Sidelsky’s advice, the sovereign government of Portugal should have boosted its economy through fiscal expansion by borrowing in the sovereign bonds market. However, Portugal faced a completely different situation than the British case, as Portugal faced enormous increases in bond yields, as investors feared contagion effects from the Greek debt crisis. Graph 1 depicts the developments on government bonds for Germany, Greece, the Netherlands and Portugal. It is clearly visible that as of 2010 the Portuguese yield started to diverge from its north-western partners, and started to converge to that of Greece. The yields on Portuguese government bonds reached a staggering 13.5 percent during the first quarter of 2012. Accordingly, it can hardly be said that Portugal’s government faced a situation in which it could borrow at little cost.
Lord Skidelsky strongly underlined the Keynesian arguments by his colleagues, as he sought to overthrow any comparison between fiscal positions of the government and households. According to Skidelsky’s reasoning, both groups are incomparable as household spending cuts merely impact the households themselves, whilst government spending cuts have heavy repercussions as its spending amounts to a large share of national incomes. Accordingly, Skidelsky argues that the optimal policy in times of financial distress is not to decrease its deficit, but rather increase its deficit in order to stimulate others’ income (Skidelsky, 2018). This argument has been further repeated by Krugman (2012):
“What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started.”
Austerity measures throughout OECD countries have led to somewhat erosion of the welfare state as previously known in most Western economies. Accordingly, the modern-day Keynesians have jumped on the bandwagon of disappointed voters leading to a large increase in their popularity throughout the globe. Many disaffected households are furious as they faced declining welfare benefits as a result of a crisis they bare little to none responsibility for. Bocconi Boys: Expansionary Austerity
Although support for anticyclical public spending has increased, economists that argue in favour of austerity have not sat at the side-line and have retaliated by the publication of several papers which provide empirical evidence of the impact of austerity. Most recently, Alberto Alesina, Carlo Favero and Francesco Giavazzi, three prominent Italian scholars which argue in favour of austerity, published a book: Austerity: when it works and when it doesn’t (2019). In their book, they undermine a crucial theoretical assumption from Keynes’ 1936 General Theory
11
of Employment, Interest and Money, as they argue that the theoretical estimates of the fiscal multiplier by Keynes and Krugman does not stand up to the empirical test. In their book, they argue that “a synopsis of studies estimating multipliers for government purchases… Most of the values range between 0.6 and 1.5”. Accordingly, if the multiplier were actually below 1, an increase in government spending may lead to a decrease in private expenditure, ultimately leading to a smaller increase of the total output than the original rise in public spending. In this light the Austerians undermine the assumption that an increase in public spending would lead to an enhanced positive impact on aggregate demand, due to a fiscal multiplier.
Alesina, Favero and Giavazzi have similar backgrounds as they all have taught at the university of Bocconi. This famous private university in Milan has gained fame by producing the top of business for Italy. Ironically, their proposed policies, aimed at reducing public spending, and accordingly public debt, has had little influence in their national spheres, as Italy’s debt remains a European outlier at 130 percent of its GDP. Keynesians, such as Krugman, have labelled Alesina and his colleagues “the Bocconi Boys” in reference to the Chicago Boys, a group of economists trained at the university of Chicago, which formed General Pinochet’s economic policy in Chile throughout his ruling. Although both the Chicago as the Bocconi boys- reference is used in a form to denigrate a group of libertarian economic thinking, both groups have self-adopted the nickname in a more positive reference. Nowadays the Chicago Boys are associated to the most prosperous and business friendly economy of Latin America, despite the innumerous warnings by both politicians and certain economists that liberalising the economy and attracting foreign direct investments would lead to disastrous results.
In their book Alesina, Favero and Giavazzi provide evidence that austerity based on tax increases indeed reduces national income and thus output at a greater scale than the tax increase itself, which seems to confirm Keynesian theory. However, their main findings on expenditure-based austerity measures are heavily inconsistent with Keynesian theory. According to their empirical findings, a decrease of public spending in 2019 by €10 million, will reduce aggregate demand by a mere €4 million in 2020, whilst the negative effect of the cut is likely to disappear 3 years later. Furthermore, it may even be the case that a reduction in public spending in 2019 has a positive effect on aggregate demand in the following years. This positive effect on output has been coined expansionary fiscal contraction. An expansion as response to expenditure-based austerity derives from the forward-looking character of individuals and businesses that foresee more fiscally prudent times ahead. In other words, through credible spending cuts, households and investors gain confidence that in the future taxes will be lower, or at least not higher. The modern-day Keynesians, such as Krugman, have yet to be convinced by such arguments as they call it believing in “the confidence theory” (Skidelsky, 2015). In an interview in 2015 Krugman further stressed his disbelief in a critique of Alesina’s notion of expansionary austerity:
“The doctrine of expansionary austerity -the proposition that cuts in government spending would actually cause higher growth despite their direct negative impact on demand, thanks to the confidence fairy- was all the rage in policy circles five years ago. But it brutally failed the reality test; instead, the evidence pointed overwhelmingly to the continued existence of something very like the old-fashioned Keynesian multiplier.”
12
Although the likes of Krugman critique the notion of expansionary austerity, little empirical evidence has been provided for the failure of it. As previously mentioned, Alesina et al (2019) argue that expansionary austerity can be a success in the case that austerity is applied through an expenditure base. It is according to this line of argument that the Troika and the Passos-Coelho government opted for a version of austerity by decreasing expenditure.
This argument by the Bocconi boys that austerity may be expansionary, if done by reducing government expenditure will be incorporated in the analysis of this research. If any forms of austerity have been applied throughout the Passos-Coelho and Costa governments, according to the Austerians it must be done through cutting expenditure in order to provide positive results. In this light it is of interest to assess what developments occurred regarding austerity. It may be the case that austerity is applied through tax increases or expenditure cuts. In this light the analysis will include an assessment of both the share of government expenditure, and its absolute value.
Conceptualization of Austerity
Although a general consensus exists regarding the basic meaning of austerity, different schools of thoughts make use of it in different forms. In order to assess whether the Costa government has rejected austerity or not it is of utmost importance to create an understanding of what these different schools of thoughts actually mean when speaking of “austerity”. The following paragraphs will set out to provide a better understanding of austerity and what it means to both parties of the discussion: Austerians and (neo-) Keynesians.
Generally speaking, Austerians incorporate a more technical definition of austerity as compared to Keynesians, which often attach certain policies (such as erosion of the welfare state) to it. Within their definition Austerians portray austerity as reducing the budget deficit (Alesina et al. 2018). Furthermore, Austerians often refer to austerity as consolidation programs instead of making use of the concept of austerity. This likely occurs, because generally people link austerity to certain policies that go against the welfare state, whilst the Austerians rarely mention specific policies regarding austerity. Rather than prescribing policies, the Austerians analyze under which circumstances consolidation; the reduction of budget deficits has been successful. As previously mentioned, they do find that the most positive results regarding consolidation is found through expenditure-based austerity. However, rarely one will find Austerians describing what specific policies should be incorporated whilst applying consolidation/austerity.
Although the Austerians themselves hardly mention what type of policies should go paired with austerity, they have had strong influence within the dominant group of neoliberal policy makers that form the heart of fiscal oversight- and regulatory- organizations in Europe (IMF & ESM). Although these policy makers have incorporated the notion of reducing budget deficits through expenditure-based austerity, they have also included strong notions to austerity from the neoliberal school. The neoliberal school partially despises the state and opposes the wasteful
13
intrusions of the state that obstruct the market system (Schwiter et al. 2018). It is this distrust of the state of neoliberals that has led to the alignment of neoliberalism with austerity, as they welcome the decreasing of the government. This neoliberal desire to decrease the impact of the state has led to the abolishment of numerous government services, such as cuts to sickness and disability benefits, and the erosion of regulations of labor markets. As austerity measures through decreases in expenditure often aim at the abolishment of government spending programs, they are often coined as neoliberal austerity.
Keynesians incorporate a similar vision of austerity as mentioned in the previous paragraph. The likes of Krugman and Skideslky, which are in favor of anti-cyclical policies, argue that government spending (fiscal expansion) is often the solution instead of the cause for budget deficits. Through fiscal expansion the economy will be stimulated out of a recession, which according to the Keynesians will automatically lead to the reduction of outstanding deficits. Furthermore, they see austerity as a manner through which neoliberals erode labor rights and in favor of capital stakeholders. In other words, (neo-) Keynesians argue that austerity measures have an inequal heavy impact on the weak and vulnerable, whilst having little- to none impact on those which behold large amounts of capital.
Besides austerity as seen by the Austerians (a technical vision) and the Keynesians (an erosion of the rights of the vulnerable), a third way, called austerity lite in this research, is feasible. In a closer view it seems as if the concepts used by the Austerians and Keynesians do not rule out one another, and thus may be compatible. In a form of austerity lite it may be the case that consolidations are applied by decreasing government expenditure, whilst still protecting the most vulnerable at the same time. In such a case cuts can occur in capital expenditures that focus on long-term investments, whilst retaining the safety net of the most vulnerable through the maintenance of benefit payments.
This thesis argues that the traditional (neoliberal) form of austerity occurred under the Passos-Coelho government, whilst a form of austerity lite occurred under the Costa government. Whether the first or the latter is responsible for the remarkable economic recovery of Portugal remains the question. However, the Costa government does show that an alternative exists to the traditional sense of austerity, by protecting the most vulnerable whilst applying fiscal consolidations.
Portugal as the anti-austerity case by Modern Keynesians
Several journalists and scholars have jumped on the bandwagon in order to pose Portugal as the exemplary case against austerity measures.
Peter Wise & Ben Hall in an article called “Portugal: a European path out of austerity?” in The Financial Times of April 10, 2019 describe how Portugal is currently seen as an important case in undermining the credibility of austerity policies:
14
“For many on the European left, Mr Costa is the prime minister who showed that the financial crisis could be tackled without destroying jobs and living standards. As he himself puts it: “It’s no longer a matter of political discussion, it’s a matter of fact””. Similarly, Liz Alderman in an article of The New York Times of July 22, 2018 called “Portugal dared to cast aside austerity. It’s having a major revival” describes how the central role that Portugal as case plays in permanently overthrowing austerity as a cure against excessive debt and deficit levels:
“Portugal took a daring stand: in 2015, it cast aside the harshest austerity measures its European creditors had imposed, igniting a virtuous cycle that put its economy back on a path of growth. The country reversed cuts to wages, pensions and social security, and offered incentives to businesses.”
Furthermore, Wise & Hall describes how the policy changes of the Costa government were received in Brussels:
“It initially clashed with Brussels by reversing public spending cuts and allowing the deficit to swell well above agreed objectives, before ultimately proving to EU officials that by putting more money in people’s pockets it could lift growth, and make it easier to meet budget targets”
Paul Hockenos went even further in stressing Portugal’s status of anti-austerity in an article in Foreign Policy: “Portugal has Emerged as Europe’s booming Anti-Germany”. Hockenos argues that Germany’s support for Portugal’s finance minister, Mário Centeno, as the successor of Dijselbloem’s post of head of the Eurogroup, hints at Germany’s admittance that its faith in austerity had ended.
“Portugal has proven it’s possible for a struggling country to defy German-imposed austerity in the EU and still succeed.”
“” Mr Centeno’s appointment is representative of a policy change in the workings of the eurozone”, said Gustave Horn, an economist at the Hans-Böckler-Stiftung, a German think tank. “It’s an admission that the hard-line austerity prescription and fiscal contraction haven’t worked, which we can see in Greece. Cutting spending and taxes in times of crisis only makes things worse. Portugal’s approach was different: first get the economy going, then get the budget right. Merkel has now obviously recognized this.””
Although the above quotes portray the idea that a consensus persists among journalists on the role that the case of Portugal should play in light of the austerity debate, a small minority has challenged this notion. Debate has risen regarding whether Mr Costa’s government is actually responsible for the economic growth that Portugal has gone through, and whether his anti-austerity rhetoric has actually transferred into anti-anti-austerity policies that would support the
15
claim of the anti-austerians. Regarding the second point of debate, it is not only right-wing, neoliberal pushing think tanks, that have openly questioned whether Costa’s government is actually putting his money where his mouth is. Accordingly, Catarina Principe, a social activist in Portugal has coined the governments’ policies as “austerity lite”, arguing that the PS is not serious in overthrowing austerity, but rather focusses on poverty reductive measures.
How neoliberal austerity in Europe fuelled the demand for a third way.
Since the 1980s the rule of thought in Europe has been that austerity is the best remedy against indebtedness and deteriorating public finances. However, as northern-European countries have regained economic growth, this has hardly been the case for those European countries most affected by the crisis and its ensuing austerity measures. Greece still beholds a debt to GDP ratio over 180 percent, whilst Italy and Portugal both behold a ratio over 120 percent, multiple times larger than the 60 percent target of the Stability and Growth Pact.
A strong point of critique with regards to the austerity measures undertaken in Europe came from a report from the International Federation of Red Cross (IFRC, 2013). The report underlines how the crisis, and the erosion of the traditional welfare states in Europe, led to a strong increase in poverty, and worsening outlook for the poor. The worsening outlook for the poor stems mainly from the erosion of social safety nets. Accordingly, the report stresses the importance of maintaining safety nets, as it becomes increasingly difficult for the poor to return to mainstream society (IFRC, 2013, p. 59).
In a report from the Center for Economic and Social Rights (CESR) Lusiani & Chaparro (2018) pose even harsher critique at the neoliberal austerity policies in Europe, as they indicate that certain policies may even interfere with basic human rights. The argument is made that budget cuts have eroded social rights such as health, education and housing. Furthermore, labour market reforms have undermined what Lusiani & Chaparro (2018, p. 13) call fair remuneration and a basic descent wage. In this light the budget cuts, combined with labour market reforms have had a significant impact on the poor, and their chances to return to mainstream society. What the reports of the IFRC and CESR both indicate is that the most vulnerable individuals of society have suffered an unequal great amount from the crisis and its austerity policies. As a result, an increasing demand for an alternative of the neoliberal version of austerity has been proposed. One in which the most vulnerable of society have a priority place over financial corporations in times of distress. If public finances have to be restored in order to overcome a certain financial crisis, must it then be the case that the most vulnerable should bear such a disproportional weight on their shoulders?
In this light, this research project suggests that, although fiscal discipline is crucial in order to maintain financial stability, different approaches are feasible. Instead of the neoliberal vision of enhancing internal competitiveness through harsh labour market reforms, fiscal sustainability could be achieved through cuts in capital expenditures, such as bailouts of large
16
financial institutions. Such bailouts have often been the centre point of Keynesian critique of European austerity, as wealthy businessmen largely profited from such government bailouts, whilst large costs were born by the most vulnerable. Such a critique has been incorporated by the Costa government, which has shifted its expenditure, in order to achieve fiscal discipline whilst retaining social safety nets for the most vulnerable.
Crisis as a window of opportunity to implement policies
Critics of the austerity measures imposed, firstly by Socrates (SP) and later by the centre-right government under supervision of the Troika, have argued that political parties may have used the crisis as a window of opportunity to pass legislature that would otherwise be largely rejected by the population. This line of argument has been numerously formulated by journalists, such as Peter Wise and Ben Hall in The Financial Times of April 10, 2019: “Portugal: a European path out of austerity?”
“Mr Costa, who was Lisbon’s mayor during the crisis years, accused the Passos Coelho (Center right) government of using the bailout as “cover” for a neoliberal agenda of rolling back state services, cutting labour costs and privatizing public assets. The bailout had impoverished the nation, he railed in 2015, “creating jobs for nurses, but in the UK, not Portugal””.
The literature on crises as a window of opportunity for passing unpopular policies is quite broad. It closely relates to the literature of how existing policies are difficultly abolished in light of the pressure that arises from the groups targeted by the policy (Pierson, 1994; Moury & Freire, 2013). It is often the case that groups targeted by a specific policy have more to lose personally in the case of abolishing the specific policy, than the rest of societies individuals have to gain by abolishing the policy. In the example of undermining certain welfare policies, such as the lowering of unemployment payments, there will be a small group that will incur a fairly great loss of income, whilst a large group may benefit through lower taxation. Whether this leads to a net loss or gain is irrelevant, as the small group has a greater incentive to oppose the change in policy, as it will heavily affect them. The large group, on the other hand, is unlikely to impose strong pressure in support of lowering unemployment payments, as it will only lead to a small benefit for them. Although policy changes are difficult, as a result of converged interests of those that may incur a loss opposed to the diffused interests of those that may benefit, some circumstances may actually help pass deep reforms. A financial, and or debt crisis, such as the euro debt crisis, can be “exploited” by governments in order to push reforms that would normally be met with severe counter pressure (Boin et al., 2009; Moury & Freire, 2013). Such crises may limit the government budgets available for policymakers, leading to a greater acceptance of the implementation of reforms deemed necessary to tackle the crisis at hand (‘t Hart & Tindall, 2009; Moury & Freire, 2013). The limited government budget during crises may lead to the realization of the larger group that may benefit from policy changes that reforms are necessary in order to resolve a crisis that strongly impacts them as well.
17
Furthermore, it is argued by Putnam (1998) that the international characteristic of crises may also help to pass reform legislation. As crises take place on a global scale, it is often the case that discussions regarding changes in policy take place in the international roam, such as the creation of the Troika during the euro debt crisis. This elevation to an international arena provides room for national governments to undertake policy reforms that would likely be strongly countered by those affected. This is partially the result of a blaming game which national governments are able to play, by appointing responsibility for such policy reforms to the international level. In this light it has often been the case during the euro debt crisis that national governments have sought to shift the responsibility for though and thorough austerity reforms towards the European institutions.
The following paragraphs will assess the austerity measures taken in Portugal in light of this argument: has the euro debt crises provided the Portuguese government greater room to implement policy reforms that would normally incur heavy opposition by those affected.
Austerity in Portugal: a case of window of opportunity?
More specifically related to the case of Portugal is the literature on whether the conditions that the IMF imposes on its loans provide room for otherwise unfeasible policies. Conventional wisdom holds that the IMF imposes conditions in exchange for its bailout loans, ultimately forcing reforms (Moury & Freire, 2013). Scholars that behold such conventional views argue that governments are unwilling to implement such reforms and some go so far to argue that the imposition of such conditionality infringes on national sovereignty (Fischer, 1999; Moury & Freire, 2013). Gorjão (2012) argues in the following citations that the conditionality imposed by the IMF on Portugal in return for its loans resembles such infringement of national sovereignty, and that the conditions are unilaterally imposed by the IMF:
“Ever since the international Troika (…) landed in Lisbon back in 2011, there has really been no question as to who would dictate the pace and developments of the Portuguese economy in the next few years. For all intents and purposes, Portugal was placed in an inescapable straightjacket by a series of rigorous obligations with which it was forced to comply to the letter.”
“Thus, Portugal was put under strict surveillance. The Portuguese government’s only viable option was to submit to it and pass each scheduled review in order to garner the much-needed external credibility and subsequent leverage for use abroad.”
It is quite likely that the Portuguese government saw the crisis as a window of opportunity to pass unpopular reforms. This holds both for the centre-right Passos-Coelho government, which held power during the reforms imposed by the Troika, as for the left-wing Socialist Party, firstly under Jose Socrates (prior to the Troika) and under Antonio Costa’s government. Prior to the Troika bailout, the left-wing government under Jose Socrates passed plans to freeze the wages in the public sector, general cuts in public spending and tax increases. Even though Socrates’
18
government held a strong left-wing ideology, which opposed austerity measures, they implemented these measures regardless of the Troika. Although several governments, including the Portuguese, have to some degree blamed the Troika for painful national reforms in order to minimize the frustration of their electorate, the argument of the Troika as a window of opportunity to pass reforms seems unlikely in the Portuguese case. In 2010, when the Socialist Party ruled under Socrates, the Troika was yet to negotiate a package of reforms with the Portuguese government. The reforms passed under Socrates are thus, if to be seen as the result of a window of opportunity, solely the result of the crisis itself.
Under the Passos-Coelho government large austerity reforms were undertaken under the supervision of the Troika. Although government officials quite often referred to the reforms as necessary within the Troika framework, it is difficult to definitely assess whether the government used the Troika as a scapegoat, or whether the austerity reforms were genuinely necessary in order to regain economic growth. However, questions arise with regards to the transition of Coelho’s centre-right government, which may have made use of the crisis as a window of opportunity to push for unpopular reforms, to Costa’s left-wing government. If the centre-right government made use of the Troika negotiations as cover for unpopular reforms, then the rise of a Costa’s left-wing government surely must have overthrown any notion of the reforms when it came into power.
When the Costa government took over several hints of economic recovery came to light, as GDP regained its growth and unemployment started to decrease. This recovery of the economy made the window of opportunity to pass unpopular reforms smaller. Besides this ever-smaller becoming window of opportunity as a result of economic recovery, it is also likely that left-wing parties, that strongly oppose austerity, are punished more strongly by the electorate when implementing austerity measures. Accordingly, the window of opportunity for the Costa government to pass unpopular legislation was strongly decreasing when the Socialist Party regained power in 2015. It is according to this rule of thought, combined with Costa’s campaign against austerity, that we set up our hypothesis which is that Costa’s government must have rejected the austerity reforms imposed in the name of the Troika under the Coelho’s government.
19
3. METHODOLOGICAL AND ANALYTIC FRAMEWORK
In order to analyze our research question, a methodological framework is set out in order to establish through which channels the question will be tackled. Furthermore, a methodological framework contributes to explaining in which way a certain methodology contributes to answering a certain part of the question. The discussion between austerians, such as the Bocconi boys, and modern Keynesians, such as Paul Krugman, also leads to two different approaches of research.
The austerians approach to analyzing austerity is what this research calls the expenditure approach. This framework consists solely from quantitative analysis of public finances in order to assess what their impact is on economic growth. These large-scale quantitative approaches have led to the hypothesis of austerians that austerity may be expansionary if done correctly. As previously mentioned, the expenditure approach mainly focuses on developments of public finance and thus takes decreases in budget-deficits through decreases in spending or increases in revenue (fiscal consolidation) as the definition for austerity. This conventional measure of austerity is mostly used by economists that seek to synthesize a thesis with regards to whether austerity or fiscal expansion serves as the optimal policy in times of crises.
The modern Keynesians, such as Krugman and Skidelsky often incorporate a qualitative analysis of certain government policies in order to analyze austerity. Accordingly, the anti-austerity approach focuses not mainly on changes in expenditure, revenue and thus budget deficit, but rather incorporates qualitative aspects of policies that may be considered as anti-austerity. Such anti-austerity approach is mostly used by political economists, which are not only interested in the efficiency of certain economic policy, but also whether policies are considered equitable. In this light political-economists attribute policies, that often occur during fiscal consolidation, such as cuts in public wages and social security and the flexibilization of the labor force as austerity measures.
This research will incorporate a mixed methods research (MMR) design, which stands apart from other methods by including both a quantitative as a qualitative component. Through the use of an MMR design, a researcher is able to combine elements from qualitative and quantitative approaches (e.g., use of data collection, analysis and inference techniques) in order to broaden and deepen the understanding of a matter (Johnson et al., 2007, p. 123).
Schoonenboom & Johnson (2017, p. 110) underline that the decision to combine qualitative and quantitative analysis into one methodological framework derives from the purpose to expand and strengthen a study’s conclusion. Important in this regard, is that the use of a mixed methods research is paired with mixed methods validity. In other words, is there a purpose for strengthening a research study by incorporating a different method, and is this a valid purpose. A study conducted by Greene, Caracelli, and Graham (1989, p. 259) distinguishes five purposes for combining quantitative and qualitative analysis in an MMR design:
20
1. Triangulation aims at convergence of results through different methods;
2. Complementarity aims at elaborating, creating a clearer picture, through the results of the other method;
3. Development aims at making use from the results in one method to help develop the other method;
4. Initiation aims at discovering contradictions, often recasting questions or results from one method with results of the other method;
5. Expansion aims at extending the range of the research by the use of different methods. In addition, Bryman (2006) breaks down the categories above and adds certain aspects such as:
1. Credibility, which argues that the method must contribute to the integrity of results; 2. Context, which argues that qualitative research provides a contextual understanding of
the relationship of relevant variables;
3. Illustration, which refers to the use of qualitative data to provide a better understanding of the quantitative results;
4. Utility, which establishes the necessity for an MMR design through the increase usefulness for application of a study;
5. Confirm and discover, aims at using qualitative analysis to set out a hypothesis, and quantitative to test the hypothesis.
6. Diversity of views aims at combining participants perspectives through both qualitative and a quantitative lens, and discovering relationships between variables through quantitative research and meanings through qualitative research.
Both studies, Greene et al (1989) and Bryman (2006), provide a clear picture of the use of MMR design and the purpose and validity of such a design. In this research the choice to incorporate an MMR design stems largely from what Greene et al coined as the complementarity purpose, as quantitative analysis alone provides a clear overview of the development of deficit, expenditure and economic prosperity, however it lacks the illustrative power that qualitative analysis has in interpreting changes in these variables. Furthermore, the decision to incorporate an MMR design stems from Bryman’s similar aspect of illustration which underlines the use of qualitative data to provide a better understanding of quantitative results. Accordingly, by incorporating a qualitative analysis, this research aims at creating an enhanced picture of the changes in public finances and government policies since the accession of the Costa government.
Quantitative framework
Firstly, this research will aspire to assess differences in public finances between the Passos-Coelho government (2011-2015) and the Costa government (2015-2019). In light of the MMR design, a quantitative data analysis will firstly analyse differences in public finances of both governments, and sequentially, a qualitative analysis will take a closer look at the results and attempt to decipher them. This framework of analysing differences in public finances are commonly used by those that promote austerity measures. In this light we will call this the
21
expenditure approach, through which economists analyse to what extent austerity measures, in this case fiscal consolidation, has occurred. This expenditure approach makes use of what this research calls the conventional measure of austerity, which is solely based on the public finances and it lays a lesser focus on what type of policies have led to such fiscal consolidation. In light of the rhetoric from Costa’s left-wing government and campaign talks of Costa’s Socialist Party, this research expects that 2015/2016 form a critical juncture, in which a transition occurred from austerity towards fiscal expansion. This transition should correspond to the transition from the preferred option of the Austerians towards the preferred public policy of (neo-) Keynesians. Furthermore, this expectation is further expressed in this research’s central hypotheses:
H1: Costa’s government has rejected the established austerity policies.
In the primary quantitative part of the study, data has been collected on Portugal’s government finances and expenditure in order to apply a data analysis. The data analysis consists primarily from assessing developments in degree of “austerity” and / or “fiscal expansion” in both governments. The data for the quantitative framework has been retrieved from Eurostat, which provides annual data of the public finances of most European countries. Eurostat provides individual tables for each European country with regards to their economic growth, deficit, public debt and expenditure. These different data sets have been combined in order to create year on year graphs that provide a greater overview how developments in Portugal’s public finances have gone hand in hand with economic performance.
As mentioned in the conceptualisation section, austerity is seen by Austerians as government policies that aim at reducing deficit budgets through either decreases in expenditure or increases in government revenue. In light of the debate between Keynesians and Austerians, austerity is the counter-version of fiscal expansion which is championed by Keynesians. In other words, in times of crises Austerians would like to see the deficit rapidly decreasing, preferably a surplus, whilst Keynesians argue in favour of fiscal expansion, and thus the increase of budget deficits in order to stimulate the economy. Austerity for (neo-) Keynesians however, often includes specific types of policies that go paired with government spending cuts; often aimed at improving economic competitiveness (decrease in labour regulations and safety nets). However, this quantitative framework part of the research will focus solely on the technical conceptualisation of austerity, as used by Austerians. The qualitative framework thereafter will incorporate this broader conceptualisation of austerity, as used by (neo-) Keynesians, through the assessment of government policies.
Qualitative Framework
Within the context of a mixed methods research design both a quantitative as a qualitative framework are applied. The quantitative method seeks to clarify the developments of Portugal’s public finances around the switch of governments after the 2015 election, with the intention to
22
find whether the new government actually rejected austerity. Although the figures may provide a preliminary assessment of this change of government through developments in deficit and expenditure, they lack the story behind the figures and thus leave a vacuum of interpreting the data. It is this gap that the qualitative framework of this research seeks to fill, in order to present a coherent story behind the figures that provide a clear vision of the development of austerity measures in the transition of governments in 2015.
Within the broad variety of existing qualitative methods, a case study approach is likely to contribute the most to the objective of qualitative methods within this research. According to Yin (2017) a case study may be considered when a researcher believes that covering contextual conditions is relevant for the phenomenon under study. In order to decide on unit of analysis it may be of importance to ask questions regarding what it is that the research aspires to analyse. As this research aspires to analyse the difference between policies of two consecutive governments, its unit of analysis are the policy changes between both governments. Through analysis of these policy changes between both the Passos-Coelho and Costa government a broader picture can be painted with regards to changes in austerity measures.
As previously mentioned, by incorporating a case study within the mixed methods research design, this research aspires to provide a greater contextual understanding of changes in austerity measures. According to the classification of types of case studies by Yin (2017) this research will apply an explanatory case study type. According to Baxter & Jack (2008, p. 547) such a case study type is used if a researcher is:
“seeking to answer a question that sought to explain the presumed causal links in real-life interventions that are too complex for survey or experimental strategies. In evaluation language, the explanations would link program implementation with program effects”
In light of our research an explanatory case study type will provide contextual understandings of policy changes under the Costa government. Quantitative measurements of austerity, such as expenditure and deficit, provide a certain indication of what occurred with regards to austerity policies from the government. However, deficit and expenditure figures are also the result of the global macroeconomic environment, and can thus not solely be attributed to policy changes of national governments.
Furthermore, as previously mentioned, a discrepancy persists in the use of the word austerity, as in economic papers it commonly holds the meaning of deficit reducing measures, through either expenditure reductions or revenue increases. However, outside the economic roam austerity is loosely used to also include specific government policies, with the aim to reduce government expenditure. In this light, newspapers often attribute decreases in public wages, social security expenditures and the flexibilization of the labour force as austerity measures. Accordingly, the quantitative framework is able to provide a greater understanding of austerity, as concisely defined by economists, whilst the qualitative framework provides a greater understanding of the specific policy changes that go paired with austerity.
23
In order to successfully assess whether austerity occurred in the broader sense of the word, this research digs into the policy changes that occurred between the Passos-Coelho and Costa governments. Most specifically a focus will lay on those policy changes that occurred that have the intention to protect the most vulnerable. If measures are undertaken that clearly erode the rights of the most vulnerable, they will be stamped as austerity, whilst measures that enhance labour rights, will be considered as anti-austerity.
The data for such analysis stems mainly from Portugal’s government program, retrieved from the government’s official website. This first-hand source provides an overview of the shifts in policies that occurred from both governments, and paints a picture of the reasons behind these shifts. Beyond this primary source, several secondary sources, such as journal articles are incorporated, in order to portray a broader view of these policy changes. Furthermore, it is likely that first-hand sources present a strongly positive narrative as their purpose is partly to preserve governments’ popularity. Accordingly, for every policy change found within the government program, second hand sources are assessed in order to remain partially objective.
Through preliminary assessment of the data it is expected that some form of austerity-lite is found under the Costa government. A third way of austerity, under which both the definition of Austerians, that seek budget reducing measures, and Keynesians, which seek to protect the most vulnerable through government action, is incorporated.
24
4. THE CASE FOR AUSTERITY: AN EXPENDITURE APPROACH
Public finance may contribute in the assessment of whether Portugal is correctly attributed the fame for being an exemplary case of overthrowing austerity measures. Furthermore, by assessing public finances we are able to analyse whether austerity measures were expenditure or tax based. The following graph depicts the development of Portugal’s deficit as a percentage of GDP since the start of the Global Financial Crisis. The graph clearly depicts an upward (positive) trend since its staggering -11.2 percent deficit the year prior to the Troika deal. Furthermore, it is clearly visible that under the Passos-Coelho centre-right government, which held government power between 2011 and 2015, the deficit was largely reined in. Through its austerity measures its deficit decreased from -7.4 percent of GDP to -4.4 percent. The relapse of increased deficit in 2014 is likely to be attributed to the bailout of Portugal’s biggest bank Banco Espírito Santo, which led to an unforeseen €5 billion injection from the government. Besides the deviation of 2014, the percentage of Portugal’s deficit steadily declined during the Passos-Coelho government, in line with the government and Troika’s aim of steadily decreasing the deficit. As the deficit measures depicted in graph 2 are measured as a percentage of GDP, it its deficit reduction is partly understated as a result of decreasing GDP under Passos-Coelho’s government.
Autor’s calculations based on data from Eurostat, ECB Data warehouse & Troika MoU (see appendix for more detailed information)
The orange line in Graph 2 represents the target of the Memorandum of Understanding on Specific Economic Policy Conditionality; the MoU of the Portuguese government and the Troika. In its objectives the MoU provides an overview of its deficit targets for the years 2011-2013 as a percentage of its projected GDP for those years. Graph 2 indicates that although a positive trend is to be found in the development of Portugal’s deficit in the years that the government enforced the MoU, a 1.5 percentage point structural gap exists between the MoU’s targets and the actual figures. This may possibly be the result of errors in GDP projections. As mentioned in the literature review, a fundamental issue of the debate between Austerians and modern-Keynesians is whether austerity has a strong negative impact on output, and thus GDP. According to the Austerians the fiscal multiplier of government spending is actually much
25
smaller than presumed by Keynesians. As the projected deficit goals of the Troika are dependent on GDP development, as they are measured as percentage of GDP, a margin of error exists regarding the estimated impact of austerity on GDP. The addition of GDP in Millions of euros in Graph 2 creates a clearer picture. A possible explanation for the discrepancy between the deficit targets and actual deficit figures may be the result of decreasing GDP under the Passos-Coelho government.
Autor’s calculations based on data from Eurostat, ECB Data warehouse & Troika MoU (see appendix for more detailed information)
Graph 3 analyses this margin of error by depicting the projected deficit and real deficit in terms of millions of euros instead of percentage of GDP. According to the targets of the MoU the government planned to reduce the deficit to €10,068 million in 2011, €7,645 million in 2012 and €5,224 million in 2013. Through Eurostat, the EU’s statistic data bank, an overview is provided of Portugal’s deficit in absolute terms. The absolute data indicates that the MoU targets have also been overstated in absolute terms, as the discrepancy found in deficit as a percentage of GDP persists in absolute terms. The actual deficit stood at €13,006 million in 2011, €9,529 million in 2012 and €8,245 million in 2013. Accordingly, Portugal’s deficit in both percentage of GDP and absolute terms was not able to live up to the targets as set in the MoU between the Troika and the Portuguese government.
By strongly decreasing expenditure and increasing revenue the government set out a plan to structurally reduce the level of government deficit. Whether the discrepancy between the targets set out in the MoU and the actual figures represent the failure of the austerity programme remains open for debate, as many other factors may have had deviating effects. In this light part of this gap between targets and results follow the decrease of GDP under the Passos-Coelho government, both inflating deficit as percentage of a decreasing GDP. Besides this primary effect of inflating deficit as a percentage, as a result of a decreasing total GDP, a second effect occurs that inflates deficit figures in light of decreasing output. If the economic environment deteriorates further than the MoU expects, a larger number of individuals may be laid off, leading to a lower total output and increased expenditure on unemployment benefits. Accordingly, it must be noted that deficit targets, such as noted in the Portuguese MoU are dependent on the severity of the shock on the economy. Difficult in this regard is which part of the discrepancy between the deficit target and actual deficit are attributed to the (possible)
