‘Austerity by stealth’, Costa's formula for Portugal

The Costa I government, indeed, managed to bring the budget deficit to its lowest level in 45 years. Doing so, Portugal regained credibility in the markets and at EU level. What is more, the Socialists in power maintained, throughout the legislature, the support of three radical left parties (the Left Bloc, the Communists and the Greens) that had put the quick reversals of austerity policies as a condition for their support to the minority government. Incumbents were, finally, electorally successful: in October 2019, Socialists were the major winner of the legislative election, with 20 more seats in parliament. 

Analysing how this was possible is a crucial question, in a time in which social democrats are having trouble getting elected (or even surviving) in many countries. According to some observers, Costa’s success was made possible by a boost in demand and production, and the fall in unemployment associated with the reversals of austerity policies. We argue that this narrative is not entirely accurate. 

[Recibe los análisis de más actualidad en tu correo electrónico o en tu teléfono a través de nuestro canal de Telegram]

To be sure, the Socialist government adopted a series of anti-austerity policies (which were at the core of the program of the radical left and were visible to many citizens; and during its time in office the country grew and unemployment was reduced by half. We show, however, that the deficit reduction and spending increase within budgetary limits were also made possible because the government maintained many spending cuts and higher taxes adopted during the bailout. They did so, however, quite discreetly –a strategy that we call "austerity by stealth".
An important advantage of this austerity by stealth strategy is that it allowed (together with the quantitative easing of the European Central Bank) for a substantial decrease in bond prices. This permitted real savings for the government, which were used in part to compensate for those hidden austerity measures during the second part of the legislature. In what follows, we demonstrate our arguments with a few figures. 

As Figure 1 shows, during the first Costa government, income and corporate taxes were lowered; but at the same time indirect taxes on petrol, sugary drinks, and net worth were raised. Other than for restaurants, the VAT rates that had been increased during the crisis were maintained. There was thus a shift from more visible (income) to less visible (indirect) taxation. 
 
Our data, in Figure 2, also reveals that spending, in absolute terms, on education, social security and health had been stable since 2013 – when Portugal was still under the bailout programme. The most striking feature is the decrease in spending on public investment since 2013: in 2018 Portugal, together with Israel and Mexico, had the lowest rate of public investment of any OECD country.
 


Given the growth of GDP during this period, public expenditure as a percentage of GDP declined during the first Costa government, allowing for deficit reduction. Figure 2 also shows that the expenditure on interest rates (that was in 2015 as high as expenditure on education) went down slightly the year after the BCE started its quantitative easing programme, but this decline became more marked after 2016 when the government deficit started to decrease.
 
A good example of how the first Costa government pursued ‘austerity by stealth’ comes from the health sector. In the first years of the legislature, the increase in working hours of all public servants (including those working in the healthcare sector) was reversed. However, the government did not hire enough workers to compensate for this reduction. As a consequence, the waiting time for surgeries increased by several months between the beginning and the end of the legislature (Figure 3). 
 
The Portuguese case finally shows that ‘austerity by stealth’ was a politically and electorally successful strategy for the socialists. Even though citizens were increasingly aware of the deterioration in public services, notably in health and transport (a central issue in the 2019 campaign), the incumbent PS gained seats and votes in the last election. This may be explained by the (partial) relaxation of 'austerity by stealth' in the year prior to the elections, but also by the fact that voters in a country that had just been bailed out placed more value than ever on the state’s capacity to keep its accounts in order.