Economists Susana Peralta, António Bagão Félix and João Duque analyze the government's "right accounts" policy, at a time when people are being pressured by the increase in the tax burden. "From a social point of view, this is very debatable. From a financial point of view, it's great," João Duque, a professor at the Higher Institute of Economics and Management (ISEG), told DN. He was asked how the Portuguese view the announcement that Portugal has dropped to 3rd place in the list of the most indebted countries in the European Union (EU), a position it held 13 years ago. What's at stake? The announcement was made earlier this week, when Eurostat confirmed that, in the second quarter of 2023, Portugal dropped two places in the list of countries with the highest public debt in relation to Gross Domestic Product (GDP). The first time the country reached 3rd place in the table was in 2010, when the rise in this ranking also coincided with Portuguese general government debt surpassing 100% of GDP. However, there were two important moments when public debt climbed well above 130% of GDP. The first was in 2014, when Portugal had already intervened in the bailout requested by the European Commission in the face of the sovereign debt crisis. In that intervention, in which Brussels was joined by the International Monetary Fund and the European Central Bank, which formed the committee known as the troika, Portugal's public accounts ended up accompanying a sharp contraction in economic activity. The second, more recent, moment coincided with the Covid-19 pandemic, and with state intervention aimed not only at saving the economy but also at keeping companies afloat. Now, with Portugal making the opposite move, downgrading the rating given to the weight of public debt in relation to GDP (and not the actual value of the debt, because it has been progressively rising, but accompanied by growth in the economy), economists are analyzing the effect of this unprecedented situation 13 years ago on people's lives. "The Portuguese are very insensitive to these facts. Highly insensitive. Because they don't even worry about things that concern them, their family or their position," says João Duque. For the economist, even when the European Central Bank started to raise key rates to mitigate the effects of inflation, putting pressure on mortgage payments, the Portuguese "didn't even go to the bank to ask them to give them alternatives to fixed rates a year ago. To convert their variable-rate debts into fixed-rate", in the face of rising Euribor rates. With this signal having been given for a year, the economist doesn't see how people will take the EU statistics office's announcement. "If this has no impact on their lives, are they going to attach any importance to the fact that Portugal now owes less in terms of GDP? This is such an abstraction for the overwhelming majority of people," he concludes, adding that "people don't care about it". But public administration debt is falling and is the result of a political decision that has an effect on people's lives. "Right accounts" "It's always good to get out of the ranking of the worst," former finance minister and economist António Bagão Félix told DN. "That's the positive aspect and it also has advantages, in that new issues can benefit from a better position, better ratings, better financial notation. Not making public life issues so expensive is a positive factor. Which, incidentally, then spreads to all economic agents, in other words, if the Republic's rating improves, in theory it will also improve the rating of large companies and the country's financial system," says the professor of economics. Whether it's good or bad, Bagão Félix stresses, all comes down to a question of options. "A mix of several things" And what does the government led by Prime Minister António Costa, and under the guidance of Finance Minister Fernando Medina, have to take into account when promoting a right accounts policy? "A government, in theory, whatever it may be, would have to build a mix between several things," replies Bagão Félix. "Firstly, some tax reduction. Secondly, an increase in public investment. Thirdly, a reduction in public debt, i.e. relief for future generations. This was fundamentally what was at stake," he said. However, the former prime minister would not have followed the government's choice to reduce public debt at the cost of higher taxes and disinvestment in public services. "If it were up to me, sitting here, I might have preferred an effective tax cut. Without prejudice to the right accounts. We're talking about a balanced budget, but not necessarily a surplus. A tax cut that doesn't exist in this State Budget. Because the tax burden, measured in terms of GDP, increases by 0.2 percentage points. There is a reduction in personal income tax, but then there is a counterpart in indirect taxes and other situations. I don't think there's been any change in corporate income tax, to make us more competitive globally, there's been no reduction in taxation on savings, which is still very high and punishes savers, especially when negative real rates are offered, which don't even compensate for inflation. This would be the way forward, in my view, but I fully understand the government's option, which is also defensible," says Bagão Félix. The former Social Security Minister's explanation proposes a formula. "What part of the gains from inflation should be turned into less tax? What part of the gains from inflation should go towards improving public services and increasing public investment? And what part of the gains from inflation should be passed on in lower public debt and therefore less of a burden on future generations, who are the ones who will pay off the debt? This mix, let's say, is a set that will have several different policies," concludes the former government official, insisting on his own vision of the problem, which would involve an "effective tax reduction", which people "would feel in their wallets, and the improvement of some Public Services which, at the moment, namely in Education, Health and Justice, are reaching breaking point". "Good things and bad things" "You either cut spending or you increase revenue," economist Susana Peralta told DN, analyzing the choice made by the government. "We can look at what the evolution of these variables suggests over time in Portugal. The fact is that the government has greatly limited public investment spending and has thus managed to achieve these results," says Susana Peralta, who has a few suggestions up her sleeve for Costa and Medina's decisions. "Maybe the government could have lowered taxes and it didn't. And it could have made more public investment from the outset, but it didn't. It could have done what was necessary for us not to be in the chaos we're in with the National Health Service or the lack of teachers or the structural problems we have in the country, or the airport that still hasn't been built," says the economics professor. But Susana Peralta also sees the positive aspects of this decision, the effects of which are on the horizon. "Portugal is no longer on the list of the most indebted countries," says the economist, explaining that "we are now much more protected from risk". And what is the risk? "The pandemic was one of the most critical moments for the economy. It makes sense that the debt increased a lot during the pandemic. What's more, Portugal was one of the countries that was perhaps more conservative in its spending to cope with that period of exception, precisely because it had a high public debt. Because there were other countries that had deficits of 19% of GDP. They were much more generous, precisely because they didn't have the burden that we had," says Susana Peralta. But the point is that "we are now better protected against risk, the pandemic is a great example of this. Countries that had fewer problems with their public accounts were able to be much more consistent in the way they relieved families and companies. The government did what it had to do and probably should have done more. In other words, I wouldn't begrudge the fact that we're not now on such an accelerated path down from 100% if we'd been more generous back then," he concludes. vitor.cordeiro@dn.pt ShareShare on FacebookTwitterEmailWhatsappShare At Diário de Notícias, dozens of journalists work every day to produce the news, interviews, reports and analyses that ensure readers receive accurate information. This has been the case for over 150 years, as we are the oldest national newspaper. To continue doing this "service to the reader", as our founder wrote in 1864, we need your support. Subscribe to your newspaper here Comments