THE PURPOSE was the same, the painful methods somewhat different. Portugal’s Socialist minority government announced an agreement last Thursday with the major opposition Social Democratic Party to an austerity budget skewed at raising taxes. Spain on Wednesday focused more on spending cuts.
In the wake of euro member states’ commitment to the €750 billion safety net fund, both contagion-threatened countries were fulfilling their side of the bargain, reassuring markets by starting to bring deficit levels down to the 3 per cent required of euro zone members. In effect, it is hoped to make the new fund redundant. Market nerves seem to have steadied in appreciation of the scale of the effort, and borrowing costs for both countries eased although the euro remains weak.
The Portuguese government will cut the deficit faster than planned, to 5.1 per cent of gross domestic product (GDP) next year from 9.3 per cent last year, and take some €2.1 billion from it. Spain announced spending cuts totalling €15 billion in 2010 and 2011, to meet the country’s revised deficit targets of 6 per cent of GDP in 2011, down from 11.2 per cent last year.
Portuguese prime minister José Sócrates announced two-year increases in value-added, income and corporate taxes. Companies will face a tax surcharge of 2.5 per cent of income and individuals will pay an additional 1-1.5 per cent in tax. Government subsidies for state-owned companies will be reduced, and pay for politicians, senior government and state sector officials will be reduced by 5 per cent, he said.
Spanish civil servants will also see pay cut by 5 per cent, and frozen next year. Ministers will take a 15 per cent cut. The government is reducing public investment by €6 billion, shelving index-linked pension rises, cancelling a €2,500 “baby bonus” tax break, cutting regional spending, and postponing infrastructure projects. The cuts were in addition to January’s €50 billion austerity package.
Unlike his Portuguese counterpart, Spain’s prime minister José Luis Rodríguez Zapatero failed recently to secure cross-party support for the austerity programme and faces opposition from left and right. Unions have called a one-day stoppage in the public service on June 2nd – significantly, however, the leader of Spain’s largest union (CO), Ignacio Fernández Toxo has ruled out a general strike, “the last thing this country needs at a time like this”. But public sector unions have already blocked a move to raise the retirement age and Mr Zapatero’s willingness to take them on will be closely watched.
The crisis measures are also likely to cause social tensions in Portugal. This year, strikes against a freeze on public sector wages created transportation chaos and forced a temporary closing of schools and hospitals. And in both countries there is a danger that the effect of the new cuts will be to depress demand and their capacity for growth. “All these measures were designed to have the smallest recessionary effect possible,” Mr Socrates insisted. In truth, as much in hope as expectation. Both countries face a difficult path ahead.