A blow on Portuguese government’s austerity plans?

Portuguese Constitutional Court rejects some budget articles. What kind of impact, if any, the decision may have on the government and on the politics in Portugal, respectively on the austerity measures introduced by government? Read few comments.

Paulo Vila MaiorAssistant Professor, the Faculty of Human and Social Sciences, University Fernando Pessoa

The ruling of the Portuguese Constitutional Court on the partial non conformity of the 2013 budget with the constitution represents a serious setback on government’s plans to bring down the budget deficit this year. As part of the agreement with the EU and the IMF, Portugal is expected to present a GDP 5,5% deficit for 2013. The aspects of the 2013 budget that were considered non-constitutional have an impact of GDP 0,5-0,6% on the deficit. The target is, therefore, seriously compromised.

The decision of the Constitutional Court has several consequences. First and foremost, it casts an implication for the austerity program designed by the Portuguese government in result of the agreement with the EU and the IMF. According to some critics, the memorandum of understanding signed between the Portuguese authorities and the troika suffered a blow. The ensuing austerity that is stake, some critics claim. That is an overstated argument. The Constitutional Court only declared that some of the measures included in the 2013 budget do not respect the Portuguese constitution. That is all. The program of fiscal consolidation is not affected. That is not among the Court’s powers, nor was such thing asked to the Court.

Secondly, the ruling of the Constitutional Court confirms how the government was not prudent at the design of the 2013 budget. The government faced a difficult challenge at the outset of budget process. The option was putting an heavy impact of the adjustment process on taxpayers’ shoulders, together with cuts on salaries that affected particularly the public sector and reformed persons. The government’s strategy was risky, as many experts on the Portuguese constitution argued that some of budget measures clearly lacked a constitutional basis. In this sense, the decision of the Constitutional Court is not surprising.

Thirdly, an important reading comes from the Court’s decision: Coelho’s government so far relied too much on increasing the tax burden as the strategy for fiscal consolidation. Many observers, from right-wing to far-left sectors, agree that taxpayers were asked a disproportionate sacrifice when called to give their contribution to the process of fiscal consolidation. Paradoxically, the Constitutional Court disapproval focused only on budgetary measures that were deemed to act on the expenditure side (a cut on public sector workers and on retirement pensions’ extra income for holidays). In my understanding, the Court took a strictly legalistic interpretation of the 2013 budget. This does not imply that the Constitutional Court should accommodate a flexible interpretation of the constitution to not jeopardise the ongoing adjustment process agreed with the EU and the IMF. It means that the Court was unwilling to accept budgetary measures characterised by inequality and thus declared them illegal. The Court was not sensible to widespread claims that the adjustment process was mainly focused on tax increases, especially because other fiscal measures in the 2013 budget (meaning an extra tax burden) were accepted by the Court.

What follows after this political turmoil? Several scenarios are at stake. Maybe the government resigns (which seems to be implausible, despite opposition parties claim that such is the inevitable implication of de-authorisation of the Constitutional Court). If the government does not resign, additional questions arise: is there a plan B now that the 2013 budget has an open wound? If there is a plan B, what are the available options? Is there an alternative way out to this apparently dead end situation?

Faced with the challenge of adjusting the 2013 budget and thus exclude the illegal measures, and knowing in advance that the GDP 5,5% deficit was already agreed with the EU and the IMF, the government has only two alternative solutions. Either the government submits to the parliament a revised budget that incorporates additional measures to respect the targeted deficit, or the government asks for a renegotiation with the troika. In the first case, the question is whether adjustment comes from an additional tax burden or from expenditure cuts. The first possibility is, in my opinion, ruled out from the overall perception that the tax burden is already too heavy, especially when the current economic cycle (negative growth and increasing unemployment) is taken into account. Therefore, the option is to cut expenditures. The one-million euro question is “where” (and how?).

I have doubts that there is enough time to plan urgent expenditure cuts when almost one third of the fiscal year is over. All this suggests that perhaps the feasible alternative is to ask the troika for extraordinary flexibility on the fiscal deficit target for 2013. In a way, this amounts to an indirect renegotiation of the adjustment process agreed with the troika. There is already a precedent, as the EU and the IMF accepted to review the targets for the fiscal deficit and the public debt for 2012. Nevertheless, contradictory arguments might disturb this alternative. On the one hand, the aforementioned flexibility granted by the troika is still recent, which runs against the possibility of successfully negotiate for the second time a more flexible target for this year’s deficit. On the other hand, the EU and the IMF might understand that the ideal scenario is far from being possible now that the Constitutional Court rejected some important measures of the 2013 budget.

Maybe the deadlock calls for the troika’s flexibility. And maybe this might be a lesson for other countries facing similar adjustment processes.

Sandrina AntunesAssistant Professor, Universidade do Minho

The Constitutional Decisions in Portugal: a “one minute” political crisis.

The decision of the Portuguese Constitutional Court was expected for some time but the bomb was dropped Friday night, at 8 pm, just before the week-end, in order to minimize the financial and political impact that could be derived from a decision that was harsh, though not very surprising. The Portuguese government has immediately reacted with some drama, claiming to be in “chock” when these decisions were more than expected, partly due to a very similar judicial decision pronounced in 2012.

On Saturday, the government gathered and five hours later, Passos Coelho went to see the President, Cavaco Silva, demanding for his unconditional support, which has been immediately conceded by the means of a short declaration published on the internet. Furthermore, on Sunday, at 6.30 pm, Passos Coelho made a short declaration on television to show his deep discontent towards the decision of the Constitutional Court. With this declaration, Passos wanted to make it clear that the Constitutional Court was the one to be blamed for the aggravation of the economic crisis as well as for putting the credibility of the Portuguese government at risk in further negotiations with Brussels.

The declaration lacked clarity and concreteness in terms of financial or economic measures to be implemented to counterbalance the consequences of these judicial decisions. In fact, the declaration aimed at clarifying the position of a government that wanted to reassert its determination and self-confidence in spite of the negative impact of a hostile Constitutional Court. However, Passos promised that fiscality would not be touched but more austerity measures would follow, namely in the education sector, health sector and in the social security sector.

Passos promised to be ruthless towards social or political discontent, stating once more that his main target is to get Portugal out of the economic crisis, “no matter what”. For the time being, the political scenario remains too fuzzy but one thing is certain: the Portuguese government will not fall. By the end of the day, we could even argue that this “one minute” political crisis has allowed the government to justify more austerity measures, without being the one to be blamed.

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2 Responses

  1. Great read. You may like this http://theconscienceblog.com/2012/11/01/the-writing-on-the-wall/

    Let me know. Cheers!

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