The politics the behind resignation of Minister of Finance

news: The politics the behind resignation of Minister of Finance

Before the elections which gave his party an absolute majority last February, José Sócrates spoke often of the need for confidence.

He gave few hints as to his actual policies, but promised a government that the people could trust to run the country. The beginning was good. Instead of the usual intrigue and press rumours about ministerial appointments, Sócrates announced his team in one go and achieved a reasonable balance between respected independents and party members. At the top of the list was one party member, António Costa, and two independents, former CDS leader and UN Assembly President, Diogo Freitas de Amaral, who came in as Foreign Minister, and Luís Campos e Cunha, the Minister of Finance.

Of these, by far the most prominent was Campos e Cunha. On him fell the burden of presenting a new budget and finding a way to cut Portugal’s horrendous deficit. Despite a series of crisis measures introduced by Manuela Ferreira Leite, the new government had to introduce yet more serious tax increases to give any hope of reducing the deficit to three per cent of GNP by 2009. It also repeated pledges to limit government spending, but did nothing immediately to reduce the enormous burden of public sector salaries, Social Security and pensions.

Economists have been pointing out for some time that the State needs to focus more on cutting expenditure than on increasing income. European economic growth has faltered and Portugal is near to reaching the limit of what can be achieved by improving tax collection. A Minister of Finance who asks his countrymen to pay more tax to help reduce the deficit owes it to them to take care that the money paid over to the State is not wasted.

But there can be times when it would be better for the State if the money were wasted (and say spent on holidays inside Portugal for public sector staff), because that would involve no long term additional expense. Some investment projects are so expensive to maintain that they become a drain on the resources of future generations. A good example are some of the stadia built for Euro 2004 – the Algarve stadium is reported to cost millions of euros per annum to maintain and it is used less than once a month.

A respected Socialist

Campos e Cunha defined himself as an independent Socialist. He was the vice governor of the Bank of Portugal for six years under António Guterres and then became head of the Economics Faculty at the Universidade Nova de Lisboa. His ideal programme for the government would have included the decriminalisation of drugs, a land tax and teaching English to all pre-school children.

He was widely respected for his technical ability, clear thinking and his independence of mind. His presence was of itself confirmation that the government was serious in its commitment to reduce the deficit and not to repeat the mistakes of past governments, which sold out to party lobbies and their main financial backers, the construction industry.

Since 1985, Portugal has had a number of strong, respected, independent Ministers of Finance, who have understood the importance of their role and have given the country confidence in the measures taken by the whole government. Examples were Miguel Cadilhe under Cavaco Silva, António Sousa Franco under Guterres and Manuela Ferreira Leite under Durão Barroso. All needed the full support of the Prime Minister to do their job well. Unfortunately, many of the others, except Eduardo Catroga who was an independent businessman, were not able to stop their governments giving in to demands to spend. The result has been an alarming growth in the budget deficit.

Campos e Cunha looked as if he was going to come in the first category and that is why his resignation is so disappointing. The proximate cause of his resignation was an opinion article he wrote in the Público newspaper, but the issues he raised must have already caused some division between himself and other ministers, and he would have needed the full support of the Prime Minister to stay in office.

In the article, he summarises the issues. “The long-term sustainability of the public finances depends on three main items: Social Security, Health and Public Investment. With an ever more rapidly ageing population, Social Security costs tend to increase faster than GDP. The Health Ministry has been developing programmes to contain costs and better manage resources, but the natural tendency of such costs to grow implies the need for additional measures, which balance budget objectives with the requirements of a fair and just public service.

“Social Security has a vast and difficult programme of reforms for the public sector, which will lead to substantial future savings, vital to long-term financial sustainability. For the private sector, similar measures are under consideration.

“The quality of public spending is particularly relevant when it comes to investment. It is a mistake to think that investment is always good. Even in our families, each of us has certainly made investments that we regret. Today, we would be better off if we had not made some investments.

“Consequently, a good investment decision depends on prior analysis of the return from it. For example, when one invests in a car hire fleet (investment cost), we cannot forget that, in the future, we will have to maintain it (future current cost) and we will need clients who support that current cost and the cost of depreciation of the investment (quality of the investment project). This simple example shows how difficult but necessary it is to choose between investment projects. Otherwise, through the cost of the investment, we mortgage the present and saddle the future with the task of paying for the loss.

“The same applies to public investment. The quality of public spending depends on a strict and well thought out choice of investments. Otherwise, we have today and in the future less State benefits or higher taxes. It is interesting to note that, historically, economic growth has little to do with the amount of public investment.”

He points out that economic growth also depends on the quality of legislation, the proper functioning of the Justice system, the stability of the tax laws and the level of education. But for Campos e Cunha there is no doubt that “the good quality of public investment is fundamental. It must be part of the solution to resolve the crisis of the deficit and not part of the problem, i.e. it must effectively promote recovery,” he said.

A master class in how

to get out of trouble

Clear and to the point – a master class in how to approach reform and how to begin to create and plan a way out. What a pity that the Prime Minister did not listen to him, and that he will no longer be there to guide government spending of our money.

What do we have instead? At the policy level, we have a government locked in a bind of its own making. It is desperate to regenerate the economy, but it is unwilling to open the economy sufficiently to make it attractive to investors. An example is its proposed new rent law, designed to encourage landlords and owners to restore run down properties.

The only way to get investment back into residential property and to save dilapidated buildings is to allow landlords to charge market rents. Various exceptions can then be made to stagger rental increases over a long period and to protect certain classes of tenant, such as the aged. Instead, the government has opted for an over complicated system, which will still be unfair to many and will not lead to the much needed private investment.

In many sectors, private initiative is stifled by excessive bureaucracy and regimentation. Each regulator and each quango represents a burden on the private sector and reduces its profitability, making all investment less attractive. One example is the recently introduced system of commercial licensing for new shops and shopping centres, which is in addition to the need for planning permission and is designed to protect small high street shops from competition. An enormous amount of paper work has to be submitted to the newly formed regional commissions, and investors have to demonstrate the economic need for the shops, but this is a decision better left to the investor. If the country decides it wants to limit certain types of new development, then it can do so through the planning system.

A second example is the Comissão do Mercado de Valores Mobiliários (CMVM), which regulates the financial and securities markets. It has increased reporting levels for funds far beyond what is appropriate, and has made it too expensive for any small business to enter the market. It leaves the Portuguese financial securities market dominated by a handful of banks and international fund managers and means that there are almost no registered independent financial advisers in Portugal.

So who is the new Minister of Finance? None other than the former president of the CMVM, Fernando Teixeira dos Santos, a good Socialist Party (PS) man, who is not likely to resist the pressure to build, build, build. Under him the CMVM trebled in size and moved into extravagant new offices on the Avenida da Liberdade. His own office appeared to be designed to compete with the presidents of the banks with head offices nearby. On past form, he will tax us even more, add to the amount of money which the government wastes and not help to build confidence in José Sócrates or his government.