A carregar...
Publicação
Adjusting to external imbalances within the EMU, the case of Portugal
Autores
Orientador(es)
Resumo(s)
From 1995 to 2010 Portugal has accumulated a negative international
asset position of 110 percent of GDP. In a developed and aging
economy the number is astonishing and any argument to consider it
sustainable must rely on extremely favorable forecasts on growth. Portuguese
policy options are reduced in number: no autonomous monetary
policy, no currency to devaluate, and limited discretion in changing fiscal deficits and government debt. To start the necessary deleveraging
a remaining possible policy is a budget-neutral change of the tax
structure that increases private saving and net exports. An increase in
the VAT and a decrease in the employer’s social security contribution
tax can achieve the desired outcome in the short run if they are complemented
with wage moderation. To obtain a substantial improvement
in competitiveness and a large decrease in consumption, the changes
in the tax rates have to be large. While a precise quantitative assessment
is difficult, the initial increase in the effective VAT rate needed to
allow the social security tax to decrease by 16 percentage points (pp)
is approximately 10 pp. Such a large increase in the effective VAT rate
could be obtained by raising most of the reduced VAT rates to the new
general VAT rate of 23 percent. The empirical analysis shows that over
time the suggested tax swap could generate surpluses and improve the
trade balance. A temporary version of the suggested tax-swap has
the attractiveness to achieve a sharper increase in the private saving
rate maintaining the short run gains in competitiveness. Finally, the
temporary version of the fiscal devaluation could be the basis for an
automatic stabilizer to external imbalances within a monetary union.Portugal has been running large current account deficits every year since
1995. These deficits have accumulated to an astonishing 110 percent of GDP
negative external asset position.
The sustainability of such a large external position is questionable and
must rely on fantastic productivity growth expectations. The recent global
financial crisis appears to have anticipated the international investors reality
check on those future expectations with the result of a large increase in
the cost of external financing. Today the rebalancing of the current account
through an increase in national savings and an improvement in competitiveness
must be at the top of the Portuguese authorities “to do” list as the cost
of a pull out from international investors is of the order of 10% of GDP. The external rebalancing is difficult as the degrees of freedom of the Portuguese
authorities are limited in number: they have no autonomous monetary policy,
no currency to devaluate, and little discretion in fiscal policy as deficit
limits and debt targets are set by the Stability Growth Pact and the postcrisis
consensus on medium-term fiscal consolidation. One possibility that
remains is to change the fiscal policy mix for a given budget deficit. The
purpose of this paper is to explore the effects of a “fiscal devaluation”1 obtained
through a tax swap between employers’ social security contributions
and taxes on consumption2. The paper begins by illustrating Portugal’s current
account evolution during the euro period. The second section section
lays out a model to offer a qualitative assessment of the dynamic outcomes of
the the tax swap. I show that the suggested tax swap can in theory achieve
the desired outcomes in terms of competitiveness and consumption if complemented
with moderation (stickiness) in wages. I also study the effects of
a temporary version of the tax swap and show that it achieves a sharper improvement
in the current account that accelerate the rebalancing. The third
section moves to the empirical analysis and estimates the likely effects of the
tax swap for the Portuguese economy. The fourth section concludes.