8 December 2016

How the Portuguese government failed its people

By Bruno Alves

Out in the waves on Carcavelos Beach near Lisbon, Hélder Ferreira stood out from the other surfers. Among a crowd of tall teenage boys who had skipped class to head into the freezing waters that morning, and strikingly beautiful blond girls carving the waves and breaking hearts, it was easy to notice a short, bald man in his fifties.

“I started down here, you know. Back in the day,” he told me as we left the sand and walked into one of the restaurants by the beach for lunch.

“In the Eighties, these beaches were what I imagine California in the Sixties must have been: the best place in the world to be a teenager. Surfing was the natural thing to do, so one day we just decided to try it out. That was 34 years ago, and I’ve been doing it ever since.”

Ferreira even managed to make it a part of his professional life: after a stint in the Portuguese Army, he became the owner and manager of a surfing equipment company in Matosinhos, near Oporto.

Like many in the country, the past few years haven’t been easy for him. An engaging conversationalist, he loses all the joy in his voice when describing how he was hit after Portugal found itself on the brink of bankruptcy in 2011.

In 2009, the government, led by the Socialist Party’s Jose Socrates (now under investigation  for suspected corruption, money laundering and tax fraud), faced an election – and chose to buy it by raising government employees’ salaries and cutting taxes, even though the budget deficit was far from under control.

At that point, Ferreira was “already freezing pay and cutting costs”. In 2010, he “closed shops” and “saw clients going down”.

“From 2011 to 2013,” he says, “I fired people, did everything I could think of.”

In 2011, Socrates and the Socialists were replaced by Pedro Passos Coelho and a centre-Right coalition of the People’s Party and the Social Democrats, who accepted an international bail-out and austerity package. “For a while, I was able to leave my employees’ salaries alone – I had to cut my own by 60 per cent, though – but by 2015, I’d had to fire everyone but for me and this one girl who’d been working with me for years.”

Things were bleak, but began to improve, Ferreira recalled. “We recovered, had some profit, and our prospects became rosier.” The same thing seemed to happen with the country as a whole: the budget deficit was trimmed, interest rates on debt bonds reached historically low levels, and the country even managed to obtain some modest growth.

“Last year, when things started getting better, everyone in the Algarve and Lisbon was still depressed, but my clients in the North were really upbeat. Now, even as everyone in the south is full of optimism and hope, everyone in the north is getting scared.”

In the election of October 2015, the coalition failed to secure a parliamentary majority. Although they had even less popular support, the Socialists led by António Costa reached a deal with both the Communists and the Left Bloc to form a government.

The new government brought in spending increases, reversed the previous government’s privatisation deals, tried to persuade the EU to nod through an unrealistic budget – and in the process spooked foreign investors, causing a spike in Portugal’s bond yields.

“These guys destroyed everything in a just a couple of months,” Ferreira sighed.

The government would disagree with him, of course. The economy is growing – although by just 1 per cent a year – and the deficit should stay below the 3 per cent of GDP demanded by eurozone rules.

Furthermore, the government’s measures – its officials argue – have “given back” income to the people who lost it during the coalition’s “austerity” years.

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But in Portugal, crises are just like the waves Ferreira surfs: when you are over one, there’s another right behind it.

Of course, those on the receiving end of that largesse were public sector workers – shielded, unlike those in the private sector, from losing their jobs at the height of the crisis – and that growth is still too low to keep up with the budget deficit.

Moreover, that deficit is only as “low” as it is because the Portuguese government has delayed funding for schools and hospitals in order to contain spending after raising public sector salaries.

It also opened about 18,000 tax evasion lawsuits in 2014 (compared with the 1,500 that the United States had in 2012). The technique used by the Autoridade Tributária – the Portuguese version of the Internal Revenue Service – is to harass people into paying money they don’t owe, in effect treating them as if they are guilty until proven otherwise; when people do complain, the state often ignores the court’s rulings.

No less a figure than Wolfgang Schauble has blamed the new government for destroying its predecessor’s good works. But while the German finance minister has reason to be frustrated with the current government, his nostalgia for the previous one is slightly misplaced.

The speed with which things fell apart after the coalition left power is also a testament to its failure while it held it: while the two parties did manage to prevent the country from going into bankruptcy, they neglected to do anything to challenge the statism they inherited from their predecessors.

In a recent book, Crise e Castigo – “Crisis and Punishment” – the economists Fernando Alexandre, Luis Aguiar-Conraria (both of Minho University in Portugal) and Pedro Bação (of Coimbra University), argue that “as the new millennium began”, the Portuguese economy “entered a long stagnation”.

For years, they explain, the country’s adoption of the euro meant that the risks of a high trade deficit – which Portugal had – were brushed aside by the financial markets, allowing successive governments to continuously borrow larger and larger amounts of money, using it to “anchor the Portuguese people’s growing expectations”.

The size of government in relation to GDP grew significantly, as did that of the many “enterprises operating in the government’s orbit”, leading the economy to “shift towards non-transactionable sectors”, ie those protected by the government from competition. This meant that the “most relevant” policy decisions were made “by those who controlled the vested interests’ networks”.

The coalition, the authors admit, did introduce some important measures that allowed the country to rein in the budget deficit – and thus conclude the bail-out program – and to transfer resources from those protected sectors towards more competitive ones (Portugal’s exports grew noticeably during the period).

But they also insist this “doesn’t mean every problem is solved”: Portuguese banks are “still very fragile”, and “while there are doubts about the quality of their assets, it will be difficult to obtain the financial resources” the economy needs.

In fact, a recent Barclays report warned that the country might be on the verge of a “systemic banking crisis” with several financial institutions – including the government-owned bank Caixa Geral de Depósitos – in need of heavy recapitalisation.

Above all, what Alexandre, Aguiar-Conraria and Bação call “the leviathan state” is not just omnipresent but weak: vulnerable to being captured by vested interests which have no interest in overcoming the obstacles to long-term growth.

Over the last few years, it has often been said that the Portuguese people were living “beyond their means”. But the truth is that the state has been living beyond the means of the taxpayers: as in Italy, taxes are too high for people to prosper, yet still not high enough to pay for the level of public spending they seem to desire.

In his latest essay collection De Mal a Pior – “From Bad to Worse” – the great historian and columnist Vasco Pulido Valente writes that “the crisis we are facing recalls other crises of a similar nature in the 19th and 20th centuries”. Since at least 1834, he argues, the country “has been on the verge of bankruptcy (or actually bankrupt)”.

Portugal, he writes, is a “small, poor and peripheral country”, in which “the economy never grew enough nor with enough speed to allow for the social mobility of the children of the middle class”, meaning that “the state necessarily had to provide them a way of life”. Everyone, Valente complains, has “always lived off the State’s protection and always desperately demanded it”, expecting “deals, privileges, partiality and favours”.

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When Portugal has been able to finance itself on the international debt markets, the country has been able to narrow the gap between its living standards and those of its European neighbours. But again and again, there comes a time – in 1892, 1978, 1983, 2011 – when governments have to face what Valente calls “the scissor crisis”: the parallel blades of hard-to-contain expenditures (because too many people depend on them) and of hard-to-raise revenues (because taxes are already too high for the economy to bear) grow further and further apart.

Portugal’s perennial crisis, as Valente argues, is one of expectations – “the simple discovery of the difference between what people wanted and the means they had”. The people were promised an ever better life by politicians – “ever more prosperous, tolerant, safer” – until “the moment when they realised with shock and awe that there was no money for that miracle”.

This, Valente writes, is also the reason why it is so difficult to enact the reforms that might help the country to improve: the rent-seeking interests that gravitate around the state and depend on its current extensive scope “suffocate the country”, but so many depend on them that the majority “won’t easily let go”.

Pedro Magalhães, a political scientist at the Institute of Social Sciences of the Lisbon University, found that even supporters of the supposedly “austeritarian” PSD/CDS government described themselves as “in favour of more government spending” and a welfare state.

In a sense, the current Socialist government is faced with the same predicament every Portuguese government must face, especially since the country adopted the euro: it is trapped between the conflicting necessities of having to use the state to redistribute to the clients that depend on it and having enough credit with the financial markets to actually have wealth to redistribute.

Yet for those who are not in official favour, the result is always the same: taxes get higher and public services deteriorate.

As the afternoon wore on, Hélder and I kept talking about the prospects for the country’s future.

“What do you say to your son about all this?”, I asked.

“I tell him the same thing I tell everyone: get as far away from here when you can, as fast as you can.”

Bruno Alves lives in Portugal and writes for O Insurgente. He tweets at @ba_lifeofbruno