Public spending cuts essential says Minister

By Chris Graeme [email protected]

Portugal’s Economy Minister has warned that the country’s economic growth will be “irretrievably” put at risk if the government doesn’t control its public deficit.

Speaking at the American Club in Lisbon last week, José Vieira da Silva said it was vital to reverse both falling economic activity at home and abroad and tax revenue.

The Minister was reacting to opposition party criticisms that the government’s programme for bringing the EU’s Growth & Stability Pact back to within three per cent of the GDP would strangle the economy.

Economist João César das Neves
Economist João César das Neves

He warned that running a high budget deficit not only compromised Portugal’s position in the EU but also made access to credit on the international money lending markets more expensive, which, in turn, made it harder for Portuguese companies to get investment loans from banks.

“If we don’t structurally control the deficit in the medium and long term then growth will be irretrievably put at risk,” he said.

“There’s nothing worse for the economy than a sustained deterioration in public accounts,” he said, adding that the consequences would put more companies and jobs at risk and therefore be disastrous for families.

“If we don’t correct a deficit that was caused to a large extent by a steep decline in economic activity due to the recession, therefore resulting in a collapse in tax receipts, if we don’t sort out this situation, then it’s the Portuguese economy that will suffer sooner rather than later,” he warned.

José Vieira da Silva added that the Government had worked out a Growth & Stability Programme designed to have the “least negative effect possible on economic growth” and said that he believed that there were indications that Portugal was “leaving the recession” and would enjoy “moderate economic growth” between now and 2013.

“The economy will continue to grow and we will overcome these effects positively. All the signs point towards growth which will help keep the budget deficit under control,” he said.

He stressed that the Government has succeeded, through good housekeeping, to bring Portugal’s public debt down to historically low levels of below three per cent until the global economic crisis in 2007 and 2008 had reduced economic activity, reduced tax receipts, increased unemployment and the need for prudent state intervention to keep the economy afloat.

Catch 22

The minister dismissed claims that the programme didn’t go far enough in cutting out waste, and insisted that the Government had “very strong goals to control expenditure” where prodigality was identified.

On the issue of privatising public participation in large companies, he said that the Government needed to work out the State’s share in each of the companies involved and then sell it at the right time when the capital markets would ensure that the Government could receive the best price for it.      

Meanwhile, economists are warning that Portugal risks entering a period of recession after economic growth has plummeted in the last six months.

It means the government’s assurances about improved growth this year could be premature as experts say that recovery could prove more difficult than expected.

Portugal is running the risk of entering a technical recession after GDP growth indicators fell one per cent in the last quarter of 2009 compared with the same period in 2008.

The government is banking on economic recovery and a return to growth in the second half of this year through 2011 to increase taxation receipts from companies.

It needs to do this in order to balance the books and reduce the country’s 9.3 budget deficit to within the three per cent mark stipulated by the EU’s Stability & Growth Pact.

Optimistic government forecasts currently pray that macroeconomic GDP activity will grow 0.7 per cent in 2010, 0.9 per cent in 2011, 1.3 per cent in 2012 and 1.7 per cent in 2013.

But after two consecutive quarters of moderate growth in the second and third quarters of last year, the Portuguese economy shrank back by 0.2 per cent in the last three months of 2009 according to figures just out from the National Statistics Institute.

At the American Club meeting, the Minister for the Economy was strongly criticised over government projected growth rates of 1.7 per cent by a Portuguese businessman who said: “If I presented a figure like that in my company, I’d be fired.”

“If the international economy continues to have problems, then we will too,” warned economist José Silva Lopes on Friday.

Another economist, João Confraria, said that Portugal’s systemic difficulties at a time when Europe was going through an extremely tough period put her on “a knife edge”.

The government was faced with a ‘Catch 22’ contradiction of needing to kick-start the economy to save jobs on the one hand through public investment projects and slashing investment and public spending to calm economic and ratings agencies on the other.

Economist João César das Neves also believes that the current fall in investment is worrying, which does “not show an interruption in growth” but does reveal “economic stagnation”.