Portugal’s own-goal over social security contributions

25th September 2012

"If the government goes forward with a proposal to change corporate social security contributions," Lachman writes, then "the Portuguese economy will be in for the roughest of rides in 2013."

The aforementioned proposal, which includes a reduction in companies' social security contributions from 24 percent to 18 percent (in order to reduce those companies' effective labor costs) – financed by an increase in employees' social security contributions from 11 percent to 18 percent – is, according to Lachman, "an attempt to effect an "internal devaluation" within Portugal's euro straitjacket."

And the public outrage against the government's social security proposal would suggest that it was "ill-advised from a political standpoint in a way that is all too reminiscent of Margaret Thatcher's poll tax in the United Kingdom in 1989, which cost her so dearly politically," he says.

"However, the more disturbing aspect of the proposal is that it makes very little economic sense, especially when Portugal is in a deep recession and the IMF-EU program is already forcing it to pursue a pro-cyclical fiscal policy….The last thing that Portugal needs right now is a further meaningful reduction of aggregate demand. Yet that is precisely what this social security proposal would do."

"A hike of as much as 7 percentage points in employees' social security contributions will surely lead to an immediate substantial decline in household consumer spending. This would especially be the case considering how income-constrained most Portuguese households are."

More important, says The Telegraph's Ambrose Evans-Pritchard, the Portuguese economy cannot recover under the policies currently in place.

"The government is asphyxiating the Portuguese economy for no useful purpose. It is pain without gain…..While mass default within EMU is theoretically possible, the country would do better to leave monetary union and restore global competitiveness at a stroke. There is nothing to be gained from dragging out the agony."

The Portuguese government, for their part, have signalled that it is willing to reconsider its planned social security levy hikes after massive street protests against the fee rise.

According to Deutsche Welle, a German international broadcaster: "Portuguese Prime Minister Pedro Passos Coelho on Monday started talks with trade unions and employers' representatives on alternatives to a planned increase in social security fees that had met with vociferous protests over the past couple of days."

Lisbon, which still faces tough austerity measures to ensure it meets the terms of a 78 billion euro ($101 billion) bailout from the European Union and IMF last year, is still wary of pulling back on its commitment to fiscal consolidation.

"As long as Portugal maintains its level of fulfillment, we know that we will have the support of our external partners. If we do not, we put at risk our fulfillment, and these guarantee mechanisms will cease to exist," Pedro Passos Coelho said in televised remarks.


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