Exactly what is Portugal “on track” for?

Hi Shaun

It depends on your aim. If it is to protect the wealth of the 0.1-1% and lower wage levels by about 30% to become ‘competitive’ with Germany , then I would say her comment is correct. Perhaps its naive to imagine there could be any other ‘track’ ?

I read with interest the article linked below, which draws attention to the wide differences between the private wealth per GDP across EZ countries. Its generally the opposite of the the widely held view.

http://www.ilsole24ore.com/art/economia/2012-11-27/private-wealth-european-solidarity-130728.shtml?uuid=AbEmpq6G

the thought that came to my mind on reading that article is that who in the rich bracket of those southern countries would be willing to buy Government debt at even 3 to 4 % ?

I’d propose they know whats up and are investing in the northern countries!

the underlying issue I think is that tax collection in these countries needs to be strengthened ( not ness raised that is) so that those who are avoiding their obligation should be made to pay

I think the same about corporations here in the UK and the top tier in the USA – attitude of ” we dont need to pay tax – we’ve paid already ” – yes and you’ve benifitted as well so pay up!

or perhaps the radical idea of paying staff well and having a large middle class might come back into vogue…..

Forbin

PS: as the pie shrinks the top class will leverage their wealth to gain a larger share of this smaller pie – to the detriment of mostly the middle class – the poor having nowt already!

It may well be hell but the choice seems fairly simple. Whether in or out of the Euro Zone Portugal has either to increase productivity by 30% or get poorer by 30%. At least within a strong currency zone Portugal will be forced to make the structural changes necessary to facilitate an increase in productivity. If it left then it would be business or, more precisely, non-business as usual. The debate has already begun within Portugal as to what sort of State the population wants. This will be far from simple as, of course, what people want is a paternalistic State but with low taxes, quite impossible to achieve. But to roll back the State after 40 years of ever increasing largesse is equally difficult. And, of course, the EU is hardly a role model in this. So, regretfully, the most likely outcome is that Portugal and large swathes of Europe will simply get poorer.

I don’t disagree, but would also add that, in the case of well off people (forget oligarchs etc), an increasing problem is that they don’t see any connection with paying a fair amount of tax and the government actually spending it sensibly or other people doing the same. Examples abound, from the extraordinary political decision to increase foreign aid, to an extra £700 million just to slow down the building of aircraft carriers to MPs expenses to the pensions of public sector workers (especially MPs). On the collection side, why should we little people pay tax when non doms pay almost nothing, when comedians avoid tax through obvious tax scams, when Tui (profits £390 mn) pays no tax, Starbucks et al pay almost nothing.
In other words, there is a danger IMHO of the unfairness of who pays tax plus the obvious political wastage that may undermine efforts to raise more tax.

[...] Portugal has found itself plunged into an economic depression which currently has no end in sight. A further danger for her is that her national debt to economic output (GDP) ratio slides even more dangerously out of control. As of halfway through 2012 it was 117.5% which is quite an acceleration on the 106.7% of a year before.  [...]

[...] Exactly what is Portugal “on track” for? | Mindful Money Go to this article [...]

Hello James

So it isnt just me who thinks his getting the sharp end of the stick!

I often wonder why I’m paying taxes at all with what I see going on…

Forbin

PS : next they’ll tax popcorn …….

Yes, but if companies pay more tax they either cut dividends ( reduces your pension), sack employees ( could be you) or put prices up ( which you pay for). You end up paying.

They have a fiduciary duty to legally optimise profits for their shareholders ( which is commonly someone’s pension pot). This whole ‘debate’ about ‘morality’ etc is hogwash. A ‘fair’ amount of tax is the minimum you can legally get away with. Tax is just the government taking money out of circulation. Far far more worrying is the amount they are putting INTO circulation to deliberately create inflation. That is what you should be worrying about.

NB Luxembourg with this supposedly very low taxation base is one of the richest countries in the world on a GDP/citizen basis. Makes you think doesn’t it. Or at least it should, the problem in the UK is the tax is too high for everyone.

Hi James, Forbin,

The world is a competitive place, that applies to individuals, families, communities, countries and continents, which is why we all identify with these groupings. This competitiveness applies to products, selling ones labour, raw materials, sport and tax to name but a few.

Tax competition is a fact of life and is good as it means governments have to compete for peoples money, they hate it as they want monopolies, which is why public services are run as monopolies. If monopolies are so good, why do they stop businesses being monopolies, I think we all know the answer to that, which is why public services charge us too much (through taxes) and deliver too little, with this country being especially bad.

It is up to governments to set up a tax structure to obtain the money think they need to spend of our behalf and then enforce the rules. The fact that greedy governments have expanded their empires for no other reason but greed, control, empire building and they think they know best (which they don’t) and the sidelining of the family unit to be replaced by the state is killing Western societies as Asia is showing that a society based on the family unit is a better system. Now the UK and many other governments greed has grown so much that they are now the wrong side of the Laffer curve and have resorted to evermore complex rules in trying to pluck the feathers from the goose and as they do so, so they create more and more holes for people to use to minimize their tax bills.

IMHO we all have a moral duty to legally minimize our tax bills, rich, middle income and poor, so we and our families can live as comfortably as possible. To single out the rich and say this should not apply to them, makes me ask the question, why not?

Governments don’t ask or have a public debate on what is their role in society, what they should and shouldn’t they do, what can they do well and what do they do badly, so they should leave it to others, it is all about more, more, more.

It has become easier and easier for many companies and individuals to become transnational, with global communications. If you provide products and services electronically, then, just move between three different countries and you will not pay tax anywhere, you don’t have to be rich to do that, and the very rich like pop stars have been doing it for years. IR35 woke many contract computer programmers up to how they could minimize their tax bill, by virtual contracting in the UK and living elsewhere. Likewise, you can setup a business in a low tax area and just ship the goods into a fulfillment warehouse or appoint a local distributor. This is how societies with more mobile workforces and companies are evolving, the glacial speed of governments can’t keep up.

A common comment I see is the is that the rich should pay more, then everything a government wants to do suddenly becomes affordable. Now we know from the recent news that there were 16,000 people earning £1m+ in the UK before the 50% tax rate was introduced and it has now dropped to 6000, but even if we take the 16,000. Lets say we will get them to pay the interest on the national debt, now £1tn @ 4% is £40bn / 16,000 = £2.5m.Earn a million and pay £2.5m tax doesn’t quite work does it and £40bn is a fraction of the £750bn that the UK government spends each year. Now you cry but what about the billionaires in the 16,000. Unfortunately, most don’t have billions lying around as many of those Sunday Times valuations include the value of the shares in publicly quoted companies they partly own or the valuations of private companies, or property portfolios Now if you started taxing on this basis, it would mean them having to sell these assets, probably to a foreign wealth fund, not a sustainable way to run a country is it, making company founders and owners sell their businesses like this. Realistically there are probably 10 billionaires with £1bn or more in personal assets in the UK, take this all off them and it might pay a month of two of our deficit, so it is not going to solve our long term problems is it!

Until the people in all western countries, with their unsustainable government spending, debts and borrowing, (which is highlighted by the PIIGS as they are at the cliff edge, we are just currently strolling toward our economic Beachy Head), rein their governments and their spending in, the countries are all in the short, medium or long term heading for a fall, where they will all run out of other peoples money. You can play around with who pays what all you like, but this fact still remains.

“A common comment I see is the is that the rich should pay more…” That of course is the Socialist or Communist viewpoint. However, show me one economy which has really been successfully run on those lines which still exists! USSR collapsed in its original Communist form; China gone in its original Communist form. Vietnam, Korea etc. etc. Real Socialism and Communism does not and cannot work! Although Lenin was right, as Keynes himself observed in his writings, all his policies could do as Keynes also observed was to destroy the status-quo, and the real economy eventually with this destruction! We can if we bother to look see this in history. The problem is that Socialists (like Blair, Brown, Camoron and Osborne) will not accept reality and fact.

If you place such dire disadvantages upon the real wealth generating sectors of any economies as those produced by Socalism, eventually you destroy the very real wealth creating processes. Utopia does not exist in the present world and cannot exist.

Hi Drf,

Totally agree.

Capitalism allocates capital much more efficiently as the money flows to the people that produce, well marketed, desirable products or services, at the right price in the right place, so people buy them. In socialist / communist systems they use committees for this who have to be all seeing and knowing to be as wise as the collective minds of the market, which of of course they aren’t, so you get massive miss-allocation of capital.

There is also a large rich people trickle down effect with the Business Angle network, not only lending money to start ups outside of the banking system, but their mentoring and contacts will considerably improve that businesses chances of success, which is in their interests, where a return on their money depends upon the companies success. There is a considerable network for this in the UK which is rarely discussed in the mainstream media.

Rich people also use their money to expand their businesses and create new ones, which increases the overall wealth of a nation.

I’m convinced one of the reasons the wealth gap is growing at the moment is due to high taxes, meaning people don’t have the spare money to start new businesses, self funding means you have much more control over your destiny, and the higher costs associated with tax and ever increasing regulation, means that this pushes up the ratio of risk v reward.

Anyway, I know from your informative posts, that you understand this.

Where the UK government are going after people for tax, shows their desperation, where they are into the area of diminishing returns, only cuts in public spending and tax cuts, can get the country back into a positive situation with private sector growth, until then it is stagflation at best.

Having just returned from Portugal I would have to whole heartedly agree with your article. The place feels ‘flat’ and in slow decline with no real indicator of where growth will come from. It isn’t the catastrophe that has enveloped Greece – not yet, but Portugal is on a slippery slope to no where. I did a bit more digging into the property market after my last comments and my findings would reinforce what I believe is a total lack of reality in the market. Agents commented that typically one third off asking prices is the very least one could expect and due to the very low sales volume it is hard to say where the market really is. There are very significant numbers of distressed sales on or coming to the market, which I am told are not being reflected in government property figures as they are considered ‘exceptional’ and not the norm. The problem is these sales are depressing the market further. Folk who are in the business say that official figures are absolute nonsense and wishful thinking and that the market is much lower than the government claims. I was also surprised to read of the number of people simply handing back the property as they can no longer afford them. It doesn’t appear to be as bad as the Spanish debacle but it is worse than is being reported.

Greetings from Portugal,

My choice is Highway to hell.

Until we manage to elect a political class that is half corrupt we don’t stand a chance.

I foressen in a near future for Portugal one of 2 things:

1. this goverment drops and i hope that the players change drasticly ( i fear the large possibility of a comunist goverment)

2. The army loses it and take over the country and we return to a dictactorship.

The people is tired of making sacrifices to support their mistakes and luxuries.

So that you make an idea, our president cost us more that your queen, our administrator of the bank of Portugal earn twice more than secretary of treasue of the USA, for our goverment someone that earns more that 80,000 EUR/year is rich and should be taxed at 50% of his wage (+/- 65,100 GBP/Year) note that this tax is not valid for their friends and themselfs.

We work a medium 40H/week and have a minimum wage of 485EUR/month with is 2,8EUR/ Hour (+/- 394GBP and 2,23GBP/hour) and we have persons with 67 Years working with this wage (67 is when we can retire), it not like in the UK that according to the age you have a diferent payment per week.

I Have 30 Years now, i’m a newly wed and very affraid to have a child because i think i cannot afford him!!! because i only make +/- 780EUR (NET) 634GBP and my wife it’s still taking her masters degree for one more year and therefore not working and in 2013 i will receive almost less 100EUR because of taxes. from this amount i have to pay for the rent of the flat (300EUR) + water + light + gas (+/- 100EUR) and i keep 300EUR for food, gasoline and public transportation and i manage it with a lot of efford but with a child is impossible even if my wife start to work.

I’m serioslly considering to do what a minister told us in the TV and leave my contry to work, because in many countries earning the minimum wage i earn more that i do now.
I have a degree in management industry i have the minimum wage according to my degree for over 5 years without any increase in pay only a fail attempt from my employer to lower it even more.

Sorry for any mistake or misspell (i dont have a spell check instaled) .

Hi JW
Thanks for the link. I see that you have generated a debate on me so let me simply add that I saw some numbers a day or two ago which backed up Italy’s private-sectors strong financial position and I find them again I will add them.

Hi David
When Portugal was going into this crisis I contacted her government (the predecessor to this one) to suggest that rather than asking for help from the Euro area she should approach the IMF on its own.
There would be two differences now under an IMF program.
1. The criteria is the balance of payments which has improved even in the current mess.
2. The IMF traditionally recommends a devaluation/depreciation which would have helped point 1 even more if it had been done.
I believe combining the two would mean that she was in a stronger position to face the future now and also psychologically would feel as if something was being achieved,rather than another year of harsher austerity to an objective which frankly looks out of sight.

Hi pavlaki

Thanks for the update on the ground. This backs up the Bank of Portugal statement about the housing markey which is not a surprise as central banks do not say that sort of thing unless it is already happening…

I see that tonight Moodys seems to be having similar thoughts.

“Madrid, December 04, 2012 — Moody’s Investors Service has today taken actions on three Portuguese banks. The debt and deposit ratings of Banco Comercial Portugues (BCP) were downgraded by one notch to B1 with a negative outlook. The debt and deposit ratings of Banco Internacional do Funchal S.A. (Banif) were lowered by one notch to B2 from B1, and placed on review with direction uncertain. The debt and deposit ratings of Caixa Geral de Depositos (CGD) were affirmed at Ba3 with a negative outlook.”

Hi Rods, “… until then it is stagflation at best” yes and at worse ravaging hyperinflation and total collapse as Weimar!

“That of course is the Socialist or Communist viewpoint. However, show
me one economy which has really been successfully run on those lines
which still exists!”

Show me an economy successfully run on capitalist lines which still exists.

No country in Euroland and certainly not the UK qualifies. The UK was capitalist in the 1800′s and the economy was marked by regular booms and depressions with terrible working conditions for you and I had we lived in those times. The land of the free, considered the home of free enterprise doesn’t qualify any more either. Indeed they have morphed into mixed half capitalist half socialist economies perhaps as an adaptive requirement to continue to exist. I see no successful communist/socialist economy nor any successful Free Enterprise/Capitalist economy anywhere.

The answer has to be people prepared to adapt. Capitalism/Socialism matters not. The old models don’t work any more so perhaps they should be thrown out and new ones developed.

I see no reason why either system shouldn’t work if implemented by people of integrity in an adaptive manner reacting to economic developments as they materialise. Of course competition will always be there in any economic system but do high taxes on the rich really stop them from investing and working? Or are they just lazy and follow the path of least resistance going to a more rich person tax friendly country?

If you have an idea you believe in and want to make it happen you do it and you try to build something. That is beyond pounds and pence and the tax rate. Tax and employment law etc will always be a problem. If you’re dynamic you simply react to it and overcome it. If you don’t want to expend that energy then you leave and that type of rich person is never going to do anything to help get the economy going again.

Even Warren Buffet thinks he should pay more tax. The problem is the tax burden on the masses because it is they who will drive the economy forward because there are so many of them and if they get a small amount of extra cash each then the aggregate effect of that extra expenditure is phenomenal. The tax cuts to the rich encourage them to do less and hoard money as they have so much they will not spend all the money handed back to them. It didn’t work in the 80′s and it won’t work now. I would never leave my country because it taxed me a lot. If it started human rights abuses and focusing on Anti humanitarian activities that would be an entirely different matter. Oh, I’d quite like to live somewhere where it’s not raining all the time too, but this has nothing to do with economic systems.

i couldnt agree more with your article. I was just trying to say that the absurd waste by governments on politically inspred rubbish makes it even harder to swallow high taxes.

I read with interest this post and the comments… the question is: what can be done locally, i.e. in Portugal, to correct the issue? How will Europe help?

The problem is generally identified but the solution seems to revolve around either higher taxes or high (around 100k) cuts in state employees.

A few months back I said at least one generation would suffer (either mine or my son’s)… the problem is if both generations will suffer with this and it seems that we’re headed this way.
I honestly don’t see a clear exit strategy here unless Europe comes together and understands the issue as a whole European-wide problem.
Fact: Portugal (and other countries in Europe) have been spending more than they should, both Government and people.
Fact: The mistakes done over the past 15 to 20 years cannot be undone in 2 years.
Fact: In a downwards spiral, tax increases and pay cuts will not boost consumption.
Fact: The cuts and tax increases so far are not enough to recover the economy either in 2013 or 2014. More cuts or taxes will be needed if nothing is done.
Fact: Unemployment will continue to grow (is now at 16,5%).
Thought: Portugal will not recover based on exports alone.
Thought: Portugal has to pay what it owes.
Thought: Portugal must have a solid economic strategy for the country within the European zone and position itself in the world, leveraging the sea, tourism, technology and high-tech, and clusters which are strong – fashion(shoes), wine and some automotive industry.

Yes, but the political system and endemic corruption would remain the same with few structural reforms. Little by little the country would lapse back into its old ways with never ending currency depreciations to protect a weak economy. At least within the Euro they have some chance to be forced to make structural changes over the short, medium and long term.

Its been years since i heard the phrase “stealing the properity of the future”, referring to the debt fueled growth of most countries. Whenever i brought it up with people who believed they knew better then i it was laughed off as idiocy or scorned as heresy.

But you can see it now so clearly – the prosperity of the now was stolen in the past.

The property bubbles which must now deflate, the excessive government borrowing that needs to be stopped or repaid, the banks that have grown by underpricing risk and now the risk has become liabilities … there’s no way to undo those things, except to let failures fail with all the calamity that comes from that.

If only the world had listened…

Hi JW,

there is another track – it needs a strong electorate and only a few countries have ever qualified to the necessary strong honest government – transparency international tries to rate this with it’s corruption perceptions index.

Simply put – the electorate has to assess honestly the political performance and keep the politicians on the straight and narrow Eg. make the politicians put the people before the 0.1%

Where the politicians advance the interests of the 0.1% before the people -> politics has become corrupted.

The solutions we need cannot start until we have honest and smart politicians.

How should Europe help ? I’d suggest that Europe should release Portugal from the unrealistic exchange rate enforced by the euro. Devaluation is a tried and tested solution which reduces wages, wealth and also reduces the cost of living.

Euro austerity reduces wages and wealth. This is very toxic without reductions in the cost of living …

What can be done locally? This will take a generation but first, the Portuguese themselves have to stop regarding the State as mother, father and wetnurse. Secondly the State has to cease being the principal enemy of free enterprise and start encouraging it instead of destroying it with endless bureaucracy, fines and culture of late payment.

Hi Noo2Economics,

” I would never leave my country because it taxed me a lot.” Good for you! However there are many people who will strongly disagree with you, and many of them are already leaving the Titanic hulk of the UK. Soon there will be only mostly Socialists left, to pay all of the taxes to support (hopefully) the continuing profligate and ballooning Welfare state. I hope you and those of similar persuasion continue to enjoy it. One question perhaps you should ask is: how can a country with such a high and increasing tax overhead, to support what you appear to love so much, continue to compete with other low cost economies? If not where is the real wealth going to come from to support your Utopian dream?

Hi Drf,
Please accept my apologies for not responding sooner but work has been hectic and I am only just catching up on non work things.

So, last time I checked the UK population had grown by 4 million. Perhaps those who left are the idle rich to whom I referred in my post in which case no loss there.

You seem to think I am a Socialist, however, having humanitarian views does not a Socialist make. Moreover, if you read my post I said that it may not matter which distribution system you use as implementation is all.

In answer to your question, I did say in my post that the problem is the tax burden on the masses and it is here where the tax cuts should be introduced because a small cut to them should result in a surge in aggregate demand whereas a tax cut to the rich will likely be hoarded. If it is spent then the value of the tax cut to the 1% would be so small in comparison to an economy of
£1 trillion as to be statistically insignificant. I am clear in my
view that the current problem is lack of consumption, not investment and a tax cut to the masses will go a long way to solving this. Once companies (with balance sheets currently groaning with cash) see there is demand they will consider expansion.

You seem to think that the answer is to abolish tax and the economy will take off. I would ask you to consider your own question. If you abolish tax, (and thereby all Government expenditure) then given that the resultant labour cost base will still be approx 6 times greater than China how will a country compete with China? If not how else will your pure capitalist Utopia be supported?

I repeat my original question – Show me an economy successfully run on capitalist lines which still exists.