How Portugal ended austerity & got growth

It is a truism in economics that everybody's expenditure is somebody else's income.  If a single individual practises austerity, and cuts their income, then that won't have any effect on overall GDP, because one person's spending is small in relation to the totality.  On the other hand, if a major participant in the economy cuts its expenditure, then it's highly likely overall income will fall.  For example, if government spending makes up 30% of GDP, and the government cuts its spending (or raises taxes) by just 3%, GDP would fall by at least 1%, probably more, because all those whose incomes have fallen will themselves spend less, creating a multiplier effect rippling through the whole economy. 

Since personal income tax and corporation tax is leveraged to GDP growth, i.e., it rises faster than GDP in an upturn and fall faster in a downturn, then any attempt to balance the budget by raising taxes and cutting spending will often fail.  Neo-liberalism prescribes austerity to reduce deficits, even in the teeth of the the evidence that this doesn't work.  Portugal is a good example of this.

From Scoop.me

Considering the booming economy, dropping unemployment numbers and the return of many once-emigrated young Portuguese citizens, it seems Portugal is on the rise. Facing the policies of socialist Prime Minister António Costa, which include properly supporting the welfare state and investing in the public sector instead of austerity measures, right wing populists don’t stand a chance.

Not too long ago, Portugal stood on the brink of catastrophe: harsh austerity policies and the erosion of labour rights pushed by the conservative government lead to significant rises in poverty and unemployment. The economy dwindled due to the lack of peoples’ spending power.

Today, everything has changed:

“Nowadays, Portugal is considered a prime example among European countries: the economy is booming, unemployment is dropping and investments are rising.” 

What are the reasons for this turnaround? What makes Portugal special when compared to other countries?

The first major change occurred during the general election in 2015. At the time, the right wing conservative government was dismantling the social welfare state piece by piece, which resulted in a furious population voicing their dissatisfaction in the voting booth – the conservatives lost 11 percent of their previous electoral votes.

Lisbon’s former mayor António Costa, a socialist, won by a landslide and brought in 32 percent for the Partido Socialista after being elected frontrunner a year prior and uniting the entire city of Lisbon during his time as mayor.

Costa succeeded in uniting the severely split left wing in Portugal, who came together to support his minority government. At first, observers were pessimistic about the potential of this coalition, predicting a collapse after a few months. Moreover, both the EU and German minister of finances saw a grave mistake in the departure from austerity. Angela Merkel described the prospect of a radical anti-austerity coalition in Portugal as “very negative”. The president of Portugal went further, calling non-conservative economic policies a “danger to national security” and attempting to keep the old government in power.

It’s been more than four years since the socialist party assumed the reins of government. The scepticism of the early days has virtually vanished. The entirety of Europe seems impressed by the success story of António Costa:

The Portuguese economy has been booming for 4 years, and 2017 marked the largest national economic growth of the century.

The Portuguese are not only showing the feasibility of socially conscious policies, but demonstrating the significant potential for success.

“The budget deficit has dropped to its lowest ever since the change to a democratic system in 1974 – simply because the government re-established and strengthened the social welfare state, leading to the Portuguese people having more money to spend.”

The socialists raised the once slashed wages and pensions, reintroduced paid vacations and retracted many tax raises, all while raising wealth taxes which affected only the rich constituents of the population. The government also introduced a property and real estate tax designed not to target the homes of average citizens. Crucially, Costa’s socialists put an end to the catastrophic privatisations that were once mandated by the EU and resulted in selling state assets at absurdly low prices.

“The assumption that one could save the economy by aggressively cutting wages and excessively attacking welfare programs was clearly a misconception”, Costa said about his predecessors.

Portugal’s swift rise from a nation in shambles to prime example is remarkable. Costa gave hope and pride back to the people after the country was shaken to its foundation by the EU’s austerity programs and the failed previous government.

The newfound optimism also influenced the outcome of the 2019 parliamentary elections

Costa’s Socialists (PS) won the parliamentary elections in Portugal with 37 percent – well ahead of the conservative Social Democrats (PSD). They finished second with 28 percent of the vote, Costa won [gained] over 4 percent and came first. The number of socialist MPs rose from 86 to 108, with the socialists winning 15 out of 20 constituencies – 8 more than in the 2015 general election.

In the current political climate, which is full of optimism, the Right cannot get a foothold.

“If young Europeans are radicalized in city districts that were economically left behind, we have to answer with social policy measures”, Costa summarized his agenda in an interview with the German newspaper Der Spiegel.

The remarkable economic growth of the past years is only the beginning. Under socialist rule, the economy grew so significantly that the money made is now set to be invested and returned to the general population. Portugal’s government plans to use the rising public sector revenue to transform the nation into a more just and modern one, after the destabilized infrastructure under the conservatives.

Costa presented a nation-wide investment proposal and surprised many once again: 20 billion Euros is considered an incredible amount of money for a country the size of Portugal. 60 percent of the funds is to go towards public transportation; the remaining money will be invested in the energy sector and environmental projects. 

The much-used railway line connecting Lisbon and Porto is to be modernized, urban subway networks will be expanded and further investment will go into public transportation in rural areas. This will generate new jobs, revitalize the economy and lift public transportation onto a state-of-the-art level. Furthermore, Portugal will become more eco-sensitive in the process. And Portugal did all this with a solid budget – in 2019 it even achieved budget surpluses.

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In 2019, Portugal's GDP growth was 2% (real), vs Europe's 1.4%.