Portugal: Stability pays

Date: 27/03/04

The prime minister wins surprising support for fiscal austerity

WHILE Portugal's finance minister, Manuela Ferreira Leite, was out shopping in Lisbon recently, an old lady came up to congratulate her warmly on her “victory over the budget deficit”. Jose Manuel Duro Barroso, the centre-right prime minister, relishes this story as evidence of how his fiscal rigour is changing attitudes in a country long used to government overspending. “Not since Portugal was founded in the 12th century has the deficit and the need to control state spending been such a focus of attention,” he says. “We are at last discarding the idea that the state is more important than individual initiative.”

To comply with the euro area's stability-pact limit on budget deficits of 3% of GDP, Mr Duro Barroso's government imposed a string of tough austerity measures, and urged stoicism when the country then suffered the sharpest recession in Europe. The economy shrank by 1.3% last year. That does not sound like a vote-winner. But at the 2006 election, predicts Mr Duro Barroso, his Social Democratic Party will win “the biggest parliamentary majority achieved by a Portuguese government since democracy was restored 30 years ago”. The Portuguese may not relish austerity, but polls bear out the prime minister's assertion that “even those most critical of my government understand that sacrifices are needed to put our public finances back in order.”

Winning votes by squeezing public spending or raising taxes is not a strategy that appeals to other European leaders. The German and French governments have used an economic downturn as an excuse to flout the stability-pact rules. And yet both are deeply unpopular with their voters. Mr Duro Barroso claims not to be a popularity-seeker. “I believe I have a duty to put Portugal back on the right track,” he says. “If there is a choice between taking the right measures and winning elections, I will always choose the former.”

In his two years in government, Mr Duro Barroso has declared two “great victories” in his struggle for sound public finances. In 2002 he slashed the budget deficit inherited from the previous government from 4.4% to 2.7% of GDP, in only eight months. “I doubt that any other country in Europe could have achieved that,” he boasts. And last year he kept the deficit down to only 2.8%. Yet he also believes he has brought in more reforms than other European countries with healthier economies. “I'm not a free-market fundamentalist,” he insists. But the state's example of fiscal rigour is, he believes, setting the tone for company and family finances too. This will enable the economy to make the most of a recovery that should be gathering force by 2005-06 - just in time for the popularity of this steely prime minister to be tested at the ballot box. Too bad that the IMF thinks the budget deficit will be back up to 4% of GDP well before then.

The Portuguese government wins surprising popular support for its fiscal austerity programme.