Sunday 28 October 2012

Until debt tear us apart?

Every month I do an analysis for newspaper Público of the implementation of the budget accounts (see here in Portuguese article 25/10/2012) based on historical records for each major item of revenues and expenditures, tax elasticities, detailed analysis of the data, etc..
It is very important to be aware of the implementation of the fiscal consolidation programme to understand whether fiscal measures are leading us to the desired lowering of public deficit in order to reduce Portuguese net borrowing requirements or not.
Starting with the simplest indicator – general government balance – the answer is no. Public deficit in 2011 (in national accounts), without one-off measures was 5,8% of GDP and in 2012 my estimate is 5,9%.    
The fiscal strategy of the Portuguese Government (under pressure of ECB/EC/IMF –the troika) was a severe cut in public expenditures through two major items (cut of two subsidies of pensioners and civil servants) and other smaller items of expenditure and to raise several taxes, more through an increase in tax rates than in tax bases.  
It is now clear that this strategy is not working. If the use of instruments does not achieve the target it is because the strategy is flawed. The social situation is getting worst, unemployment is rising, bankruptcy of firms is increasing, civil servants are frustrated with wage cuts and no career prospects, and yet …public deficit is not decreasing. However, neither the government nor the troika still recognizes this.

Deficit 2012 State Budget Rectified(1)
Lower tax revenues
Budget overestimation of central governments' Wages

Variation in Social Security Accounts

One-off measures (PTP) or savings (MF)
Défice 2012 OER(2)
Source: MF -Ministry of Finance, PTP-Paulo Trigo Pereira  - own calculations
Estimates of deviations from budget target  (% of GDP). Negative deviation decreases deficit.
(see detailed explanation and further information in the Portuguese article).
Curiously Portugal will have a surplus in the primary balance in 2012 (excluding interests of the debt). With a ratio of debt to GDP approaching 120% and a recession, unless there is a sharp and quick decline on the interests of the debt or Portugal will not be able to repay the principal. The ECB should anticipate the intervention in countries with adjustment programmes (under OTR) in order to decrease the interests of the debt.   It seems the only reasonable solution.

PS The IMF just released the 5th evaulation of the Adjustment Programme. It deserves a further scrutinity here... 

Thursday 25 October 2012

MoU, 5th update

The new update on the Memorandum of Understanding is now available here, observations and comments to come in the near future.

Wednesday 24 October 2012

La raison on Fiscal Devaluation

A piece by prominent French Economists on the fiscal devaluation, que dis-je, une devaluation fiscale!


Wednesday 3 October 2012

The Roots of the Euro Crisis Lie at the Doorsteps of the ECB

I have written a column,  published in EconoMonitor, which argues that deficiencies in the Eurosystem monetary policy contributed to the “euro crisis”, which is, in reality, an intra-Eurozone balance of payments and external debt crisis.  It claims that the Eurosystem’s monetary policy instruments and procedures allowed intra-Eurozone external imbalances to accumulate since the start of the third phase of the EMU in January 1, 1999. As a result, though the Eurozone has low levels of net external debt relative to its GDP, it presently confronts, in its midst, what is likely the largest peacetime external debt crisis the World has ever seen.  Moreover, it points out that the Eurosystem’s monetary policy has always had large fiscal effects and currently results in financial transfers from Eurozone creditor countries (the GNLF) to Eurozone debtor countries (the GIIPS) that may amount to 1.3% of the GIIPS’ combined GDP per year.

Please see full post here.

On the subject of how the ECB has recently (ab)used its vast (unlimited?) powers I recommend the reading of the following column by Karl Whelan. 

Fiscal devaluation à la façon du chef

France is probably the next country to use a decrease in the employers' payroll taxes to boost competitiveness. How is it going to be financed? It is not clear yet, but according to Le Monde this could be done via the Contribution Sociale Généralisée, which is basically an income tax falling on all sorts of income and taxable gains (including earned and pension income, property rental, investment income, bank interest and capital gains). It is also likely to be targeted only at average wages (between 1.6 and 2.2 times the minimum wage), a novelty with respect to the former proposition which targeted the left tail of the wage distribution. The proposal is still in its very early stages, so many things can still be fine tuned. But it could be bad news for Portugal if our European partners manage to decrease their labor costs in innovative ways...