On this initial post, I will refer to my experience at the IMF to speculate about economic policy in Portugal in the next few months. It is usually claimed that economic policy will be limited to the application of the vast program agreed with the international institutions, but this is not necessarily true. Every IMF program has quarterly reviews when staff assess whether the program is on track, a necessary condition for the IMF’s Executive Board to approve the corresponding disbursement. The approval of Portugal’s first review, to be completed by September 15th, will release €3,8 billion from the IMF and twice as much from the European financing facilities. In preparation for that review, a troika mission will be in Lisbon for much of August, to analyze June data and the conditionality for end-July.
It is very common that the details of an IMF program change during the quarterly reviews. As long as the main objectives of the program are not at risk, the IMF tends to accept any changes of one measure for another that the local government proposes. It is possible that review dynamics are different in the case of euro-zone countries, making changes less likely since many institutions are involved. However, yesterday’s Eurogroup decision to approve the latest review of the Greek program, has proved that even for euro-zone countries the program that is implemented can be quite different from the program initially approved.
Less than two months ago, international experts made a thorough review of Portugal’s budget, and concluded that the 2011 targets could be achieved with implementation of the 2011 budget and a few extra expenditure measures. Nevertheless, the first real decision of the new Portuguese government was the creation of an extraordinary income tax to raise an additional €800 million. Why? My guess is that the government realized that the expenditure cuts incorporated in the 2011 budget will not materialize, and went for the easy option: a tax increase. Given that programs can be adjusted during reviews, I am afraid that this will happen often: having failed to achieve the proposed expenditure cuts, the government will replace them with tax increases. In the end, instead of a program with a reasonable expenditure / revenue mix of measures (two thirds / one third), we may end with a growth crippling one third / two thirds mix.