The Price of Irresponsability

A quick assessment of the new austerity measures (in Portuguese... sorry!).

What to think

1) The negotiations between Passos Coelho, the leader of the main opposition party, PSD, and José Sócrates, the Prime Minister, did not really break down. They were simply interrupted. I hope. The two men are clashing in many issues and one of them is certainly their character - I don't need to have lunch with Sócrates to know that I wouldn’t buy a second hand car from him.
2) The Prime Minister wants Coelho to sign a blank cheque before the Budget goes to Parliament, in a fortnight’s time, and of course the latter does not want to do that: we may guess that he wants his MPs (unfortunately he is not one of them because the former PSD leader blocked his election) to discuss the budget, loud and clear, so that he does not loose his electorate.
3) Passos Coelho should not follow the same people in his party that proposed the "revisão constitucional" which was an ideological, badly designed and unnecessary move. He does not need ideology but pragmatism instead.
4) Cavaco Silva, the President, will ultimately help Passos to get out well from this episode.
5) Passos needs to get the Budget passed and to be able to say that he did what was best for the country.
6)It may be necessary to raise taxes in order to fulfil the deficit target for 2011 agreed with Brussels.
7) Contrarily to common sense widely spread in Portugal and abroad, this country has a good record in keeping its international financial obligations and that tradition is well embedded in both the Socialist and the Social Democratic parties.
8) People are not protesting on the streets, contrarily to Greece, France or even Spain, which somehow prouves the point above.
9) Since Cavaco Silva´s reforms, back in the 1990s, Portuguese governments have at their disposal enough tools to cut expenditure and/or raise taxes, as they wish (tools that Mário Soares, for instance, did not have in the early 1980s).
10) Let's see what happens next.

SCUTs or how to make life messy...

   Last week, the major decision from Government was to introduce tolls in highways that were built under the concept of "no cost to the user" - Government would pay private contractors that built and operate the highway according to traffic (with some "demand insurance" though).

   Now, faced with severe budget constraints and having to cut down public spending, the Government introduced payment in highways where people were already used not to pay.

   But given the protest of local populations, that were using arguments put forward some years ago by the same Government, exemptions and discounts were created, based on household distance to the highway.

   From a pure economics viewpoint, price discrimination, as this is the case here, can be welfare increasing - translating from our jargon, it may be good for society that different prices apply to different people.

   The problem is when pure economics meets political economy - by having differential treatment as a rule, everyone will claim and press the Government to have particular exceptions - thus transforming tolls in highways into a bargaining game.

   I wonder what will be the end result, especially if in highways where no price discrimination exists populations start demanding application of the same rules.

The monster fights back

In Greece, until July, public expenditure had fallen by 14%; in Ireland 2.9%; in Spain 2.5%. What about Portugal? It raised by 4%.

-- Ricardo Reis