Petrol price hikes threaten government’s economic recovery.jpg

Petrol price hikes threaten government’s economic recovery

Chris Graeme makes sense of Portugal’s school report from the OECD

PETROL PRICE increases to between 72 and 74 dollars a barrel of Brent could spell disaster for Portugal’s chances of climbing out of the recession, analysts warned last week. And given Portugal’s almost total reliance on imported fuel sources for power, industry and transportation, the oil price increases are unlikely to provide welcome news to any finance minister.

The International Monetary Fund (IMF) has already warned that continued instability in Iraq, problems with Iran (together the world’s fourth largest producers), coupled with the United States’ inability to close the gap on her balance of payments (the largest in the world) and China’s insatiable need for oil, could push the world into a recession. And that’s not the end of the government’s problems ….

The Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund and the Bank of Portugal have warned that the knock-on effect of higher fuel prices will be higher transport costs, which in turn would be passed on to the consumer, causing inflation. All this could negate the positive effect of the government’s current economic austerity measures to bring state and consumer spending under control.

The OECD, based in Paris, while welcoming Portugal’s attempts to balance her books, has sent a “must do better” message to the country’s government. In a statement, the OECD said it “doubted” that the government could comply with its objectives to get the state budget down to the three per cent acceptable level in the rules set out by the European Union’s Stability and Growth Pact.

In its 18 month report about the Portuguese economy, the OECD said the PS government’s saving plans were certainly “ambitious”, but questioned the government’s ability to put in place the measures it has come up with to cut the budget, although applauding and agreeing with all of them.

The OECD stated that Portugal must take additional measures to reorganise her social security system, given the fact that the bulk of Portugal’s population is getting older. It also called for further cuts in public spending.

In a nutshell, the OECD said Portugal’s short-term prospects were limited. State spending was too high and the government needed to put public finances on a sustainable path, improve the education system, modernise university education, training, stimulate innovation, and create a more dynamic business environment through structural reforms in product and labour markets.

The government’s spending reforms were “going in the right direction”, but implementing them remained the sticking point. The government needed to reform the general pension system, introduce medium-term spending ceilings in major spending areas and cost benefit assessment of public investment. It had to simplify the tax system and not change it constantly, in order to raise revenue and encourage economic growth.

Improving primary and secondary education would narrow the human capital gap with other countries, since Portuguese children spent too few years in formal education and do not perform as well as those in other EU countries. The problem wasn’t a lack of resources; it was that the resources were mismanaged, wasted and the system was inefficient, while teachers were poor. There needed to be student and school assessments.

It was suggested that adult training, university courses, better research and development centres were all essential for modernising Portugal’s economy and increasing living standards. Private investment should be encouraged here, since the potential returns to business were high. The college and university system needed in-depth reorganisation and rationalisation, pursuing courses that encouraged innovation, communication and IT. Business links between public research institutions needed to work closer together to create a competitive environment in the way Finland and Ireland succeeded in doing.

Lastly, the government must encourage a dynamic business environment and improve the functioning of the labour market to boost productivity and growth, and make Portugal more competitive in the international environment. This could be helped by reducing regulations and administrative red tape, encouraging innovative firms and getting rid of poorly performing ones, while attracting foreign direct investment. Resources needed to be better allocated, managers needed to perform better, while the electricity and telecoms sectors needed pro-competitive measures to increase efficiency and push prices down.

The OECD’s position is one that the centre-right opposition PSD party has been quick to capitalise on, with deputy Miguel Frasquilho saying: “When we hear both the Prime Minister and Minister of Finance congratulating one another with being on target to meet their state budgetary objectives, it seems there are two different worlds – the world of government propaganda and the real world summed up by the economic reports.”

But last week the Minister of Finances, Teixeira dos Santos, said he was doing everything necessary to bring the state budget nearer to the three per cent limit set out by the European Union. Talking after a meeting of the Council of Ministers, Teixeira dos Santos said that laws had been put in place to guarantee that things would run as planned.

“The law sets out sanctions that can be imposed by the Ministry of Finances to whatever entity that does not comply with these obligations and the Minister will not hesitate taking recourse to legal measures in order to bring things under control,” he said.

The Finance Minister also said that he was confident that the correction of public accounts would run as anticipated without mentioning what additional extraordinary measures he would use in case things didn’t go as planned.