What if the new government to leave the next elections decide not to take new austerity measures and also suspend the IRS surcharge and reset wages in the civil service, what will happen to the economy and the deficit? This was the exercise done by the Council of Public Finance (CFP) in its latest report, which concluded that the Portuguese economy to grow more than predicted by the current government, but that European fiscal rules would be far from realized. The given recommendation is that you try to grow the economy “without an irresponsible fiscal policy.”
According to the report on the situation of Portuguese public finances for the period between 2015 and 2019 published on Wednesday in the absence of any new measures of fiscal policy (which would imply, for example, not to renew the IRS surcharge and reset from 2016 the value of salaries of civil servants before the courts), the Portuguese economy would record growth rates that have not seen in Portugal for over a decade. After 1.6% this year, GDP would achieve a variation of 2.3% and 2.4% in 2016 and 2017. The economy would continue to grow more than 2% in 2018 and 2019. These values are higher than projected by the Government, which always points to growth below 2% by 2018.
The consumption and investment were the main drivers of this acceleration of the economy in the scenario outlined by the CFP, with the immediate contribution of effect that the disappearance of surcharge IRS and higher wages in the pubic function would have the disposable income of the Portuguese.
The problem, says the CFP, would be what would happen to the fiscal indicators. “The mere fact that the absence of measures to improve the state of the economy does not solve the budget problem of the country,” said Teodora Cardoso, summarizing the conclusions of the report.
According to the CFP accounts after from a deficit of 2.8% in 2015, Portugal would display again a value above 3%, which was bringing the country into a process by excessive deficits. It is true that the largest growth of the economy to help, thanks to the effect on tax revenues from increased consumption and investment, but the negative budgetary impact of issues such as public sector wages, the surcharge, an aging population or the planned elimination IMT would be stronger.
And meet European fiscal rules would require even more. It is necessary that the structural deficit (which takes into account the evolution of the economy) fell 0.5 percentage points to reach 0.5% of GDP.
The CFP says that without consolidation measures are taken, this structural deficit, instead of falling to 0.5% in 2016, would rise to 2.4%. This differential of 1.9 points of GDP – something like 3,500 million – represents the consolidation effort that a future government might have to do if you want to meet EU fiscal rules. And for the next few years, the effort remains.
The CFP did not calculate what will happen to the economy if a future government decides to take the same measures to bring the fiscal indicators within the rules. “It depends on the measure,” said Teodora Cardoso. The effect will necessarily be a reduction in economic growth over the track base scenario.
To Teodora Cardoso this is something that has to be done? “Fiscal policy has to take a very close attention to the timeless consequences. We have entered a new phase, we have opening for growth policy. But this growth can not be based on an irresponsible fiscal policy. We can not go back now with everything behind and go. The growth has come on the private sector and less of a fiscal impulse, “said the president of the CFP.
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