The IMF has told Portugal that the draconian austerity budget it has passed for 2013 will not be enough and has asked for more austerity. Portugal needs to make up a 4 billion euro gap and to do so the IMF wants to see cuts to government salaries, cuts to the government pension plan and a reduction in headcount.
Just as a recap here, let’s remember that the fiscal cliff in the US is nothing compared to the severity of tax increases and budget cuts the Portuguese government is enacting. In fact, the tax increases are the highest in Portuguese history.These measures have been very unpopular and has taken a toll on support for the government. Nonetheless, the government feels it is necessary if it wants to be in a situation similar to Ireland, with capital market access, looking to exit the Troika program and join Spain and Italy as targets for ECB monetisation.
The fact that the IMF is leading the charge for more austerity tells you that the IMF hasn’t changed 180 degrees from days of old. They still recommend austerity as a policy tool of choice; they just want it to be less front-loaded. But, as to specific advice on Portugal, El Pais reports that the IMF has said that the Portuguese social safety net is disproportionately geared toward the rich and the elderly and this leaves young people entering the workforce insecure. Their solution is to cut the unemployment benefit subsidy period from its present 26 weeks and reduce the benefit to only 400 euros after ten months of unemployment. The goal, I guess is to encourage people to find work rather than using social programs. Frankly, this sounds bonkers to me since Portugal is suffering a shortfall of demand due to higher taxes and reduced government spending. People out of work are out of work because there is no reason to hire them due to this shortfall of spending in the economy.
The takeaway here is that the austerity pain in Europe will continue indefinitely, with no end in sight. Despite the IMF’s mea culpa that its austerity recommendations earlier in the crisis underestimated the economic impact, the IMF feels that the impact now will be less severe. So they are now proposing more of the same austerity medicine to Portugal. The result will be recession, high unemployment and a continuation in the Troika program – not an improvement to match Ireland.
Source: El Pais (Spanish)