Tuesday 20 September 2011

For those who need it stated more bluntly

This is why I and the IMF were insisting last week on the need for a fiscal devaluation. It seems the political appetite for this policy is not there. That is fine; it was one option, and there are alternatives. What is not fine is to ignore that the dismal growth forecasts for 2012 can compromise the entire adjustment and rescue package. As I wrote in my essay last week:

"Se o governo não quer cumprir esta parte do acordo, então tem de pensar a sério, e rápido, noutras medidas que evitem uma recessão profunda. Seria uma pena se a desvalorização fiscal tivesse dado o seu último fôlego, mas seria uma tragédia se fosse a economia portuguesa a perder o fôlego."


  1. Fully agree on need for growth...also it was one of the few measures in the package that could have a positive growth impact. However, also would suggest thinking outside the EU box in terms of policies for export promotion. In fact, with the crisis in Europe, rules are being changed all the time (for example interest payments by Portugal) and maybe we could get some bargaining power with EU institutions for temporary waivers on types of policies that can give a competitive edge to domestic producers that export. These can be temporary and need to be well designed (to ensure right incentives). They might be tempted to accept as long as there's one country and a package of measures that demonstrate some type of medicine that credibly can overcome the crisis.

  2. I'm interested in gaining better knowledge on the topic of fiscal devaluation. In that sense I would like to post a question regarding the proposed fiscal devaluation. Ricardo Reis carefully explained why a decrease in TSU with a correspondent increase in the VAT would have a zero impact on domestic production or on the price of non-tradable goods. After the IMF argued that the increase in the VAT should be focused on the lower and intermediate levels of the VAT system, a doubt came to my mind. The hypothesized TSU reduction would cover the entire economy, however the increase in the VAT would not cover the upper level. That way, companies producing goods that go into the upper level would be promoted because would have a reduction in the cost of production without the surcharge in the selling price.

    Wouldn't this be an incentive to entrepreneurs to shift to such sectors? Similar to the shift that the fiscal devaluation is intended to target, this is to the tradable sector, wouldn't it?

    I would like to have an explanation to the potential effects that not changing the upper level of the VAT would have in order for me to better understand what could be the consequences of a fiscal devaluation as the one proposed by the IMF.

    Thank you.

  3. "Ricardo Reis carefully explained why a decrease in TSU with a correspondent increase in the VAT would have a zero impact on domestic production or on the price of non-tradable goods."

    Repare que dado que a subida do IVA não é generalizada, grande parte do argumento do Ricardo Reis não se aplica. Uma coisa era subir o IVA para todos os produtos de forma homogénea, outra coisa é acabar com as taxas reduzidas e intermédias do IVA. Isso vai ter impactos nos preços relativos dos bens, e há muitos sectores que verão o IVA manter-se e, simultaneamente, uma descida da TSU, pelo que os efeitos não se compensarão; e outros sectores enfrentarão uma forte subida do IVA e uma comparativamente modesta descida da TSU.
    Assim, penso que a sua questão faz todo o sentido.

  4. Caro Luís, obrigado pela resposta. A sua resposta vai de encontro aquilo que eu pensava, mas não sendo eu propriamente da área, quis antes ouvir alguém com mais experiências, antes de eu próprio tirar conclusões precipitadas.

  5. Dear Ricardo Reis,
    As others said here before, I also fully agree on need of a stimulus package in order to assure economic growth. However fiscal devaluation (TSU reduction) would be is a very risky step and the increase of VAT would be a complete disaster for some very important sectors such as tourism.
    The only thing we have for sure, in case this measure go ahead, it's that social security accounts will suffer a huge negative impact in the coming years, and pensions of lower and middle class will be in risk.
    An option to TSU reduction and that can produce a similar result with no risk, would be a reduction of 3 days (from 25 to 22) on vacation time and the elimination of 2 or 3 national holidays.

  6. the Dismal economy with plenty of fanatics (economic faNUM (TEMPLE) templates) proudly claiming they do have the final solution.....

    yes it's nice...e o inglês melhorou muito em relação a postes anteriores

    deve ser da caça aos cobres