This piece is even more relevant now than it was in its 2020 incarnation, as Chancellor Rachel Reeves may be about to impose yet more austerity in an attempt to grow the UK economy. In January five years ago, 99% hoped that writing about Portugal’s experience might offer a useful precedent for the newly re-elected Conservative government, which seemed set to continue with the austerity of the previous 10 years.
Unsurprisingly, they didn’t listen. The Bylines Cymru Austerity Project offers a timely opportunity to revisit Portugal now. Not only to look at how it tackled austerity but – most pertinently for Rachel Reeves – how it grew the country’s flatlining economy at the same time.
Austerity need not be permanent
Since 2010, the UK has experienced the effects of austerity: low growth, stagnant incomes, failing public services, and rising poverty. In the 2019 general election campaign it seemed both major parties were planning to spend more. But the UK returned a Conservative Party purged of its more moderate elements, with a large majority and on a manifesto which constituted a licence not to spend. Nearly six years on, even a Labour government seems wedded to further austerity.
Though not an exact parallel, and not illustrating a perfect solution, Portugal’s recent history shows the UK is not in fact doomed to permanent austerity.
- Austerity was harsher in Portugal than in the UK and the results were worse.
- Portugal was set on ending austerity – with impressive results.
- But there has been a cost: investment has suffered.
Austerity was harsher and results worse
Portugal is a member of the Eurozone, so doesn’t have its own currency, nor its own central bank to bail out banks, as the UK does. When the global financial crisis hit, this mattered. Government debt levels, previously close to – though not absolutely compliant with – the Maastricht criteria, began to rise. And it wasn’t within Portugal’s gift to demand that the European Central Bank (ECB) respond on its behalf.
Portugal was forced to accept a rescue package. The Financial Times stated in 2019: “Although not as traumatic as the experience of Greece, Portugal’s rescue was bruising. In an effort to control ballooning debt, stabilise precarious banks, and introduce growth-friendly reforms, Lisbon negotiated a 2011–2014 austerity programme with the European Commission, IMF, and the ECB – the so-called troika – in return for a €78bn bailout.”
“Years of economic pain followed. The then centre-right government under Mr Passos Coelho made drastic cuts to health, education, and welfare spending, along with state pensions and bank holidays. Taxes were increased. In the public sector, working hours were extended while the minimum wage, salaries, recruitment, and career progressions were frozen.”
As a result of this ‘rescue’ Portugal, which had started to recover from the effects of the financial crisis, was plunged into a second, deeper recession.
The result was an extraordinary level of pain for Portuguese citizens. Unemployment rocketed, wages fell, incidence of low pay increased, and public services suffered.
The Financial Times again: “Tens of thousands of businesses went to the wall in the country’s worst recession in almost 40 years. The welfare net was stretched to breaking point as unemployment soared above 17%, leaving more than 40% of under-25s out of work. Hundreds of thousands of mainly young, skilled workers emigrated – a loss of more than 4% of the working age population.”
Determined to end austerity
The New York Times described Portugal’s turnaround from 2015 onwards, under a new centre-left government: “But as the misery deepened, Portugal took a daring stand. In 2015, it cast aside the harshest austerity measures its European creditors [the troika] had imposed, igniting a virtuous cycle that put its economy back on a path to growth. The country reversed cuts to wages, pensions, and social security, and offered incentives to businesses.”
The Financial Times pointed out that this was highly controversial at the time, “It initially clashed with Brussels by reversing public spending cuts and allowing the deficit to swell well above agreed objectives, before ultimately proving to EU officials that by putting more money in people’s pockets it could lift growth, and make it easier to meet budget targets.”
Prime Minister António Costa said: “People were highly sceptical about our economic policies. But we have shown that it is possible to raise incomes, lift private investment, cut unemployment, and still have sound public finances.”
With impressive results
Our analysis shows how critical the decision to end austerity was to restoring growth. The chart below shows that, as austerity decreased over time GDP growth increased, and the blue (best fit) line shows the trend from 2012 (far bottom right) to 2018 (top left). The change in the general government structural balance as a % of potential GDP has been used as the measure of austerity in each year.
Of more direct interest to the average person is the impact on unemployment and incomes, which are also both dramatic. Unemployment fell to below the level it was at prior to the financial crisis.
And here is the impact on incidence of low pay, which was one of the major casualties of the austerity programme:
As the New York Times explained, the results were not just in the numbers. Portugal had a newfound confidence. “The economic about-face had a remarkable impact on Portugal’s collective psyche. While discouragement lingers in Greece after a decade of spending cuts, Portugal’s recovery has pivoted around restoring confidence to get people and businesses motivated again.”
João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics, said: “The actual stimulus spending was very small. But the country’s mindset became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”
Portugal’s economy is doing better. Its people are doing better – especially the low-paid – and morale has recovered. It is a remarkable success story. Especially when compared with how the UK performed over the same period.
But investment suffered
Not everything in the garden was rosy, however. Although the budget deficit, which peaked at 11% of GDP during Portugal’s 2010–2014 debt crisis, was almost eliminated under Costa, that came largely at the expense of public investment. Effectively, the government felt it was obliged to cut investment to prevent too great a ballooning of public debt, at a time when its remedy of increased spending was still seen as heretical.
Many people feared this was storing up problems for the future. As Reuters reported, “A recent report by the International Monetary Fund found Portugal actually had net public investment of about negative 1.2% of GDP in 2016, putting it at the bottom of a list of 26 rich countries, including Greece, Italy, and Spain. That means it is not spending enough to offset the depreciation of state assets. However, the government says it has had little choice but to prioritize cutting the deficit, to gain credibility among investors and help the economy recover.”
We have our own currency and central bank, giving us far greater freedom around borrowing and spending, and even money creation. In this respect, anything Portugal can do, we can do better.
Money is not the issue
The 2020 article ended there, but the lesson stands for Rachel Reeves in 2025. The country needs to spend if it is to grow the economy and deliver the promised national renewal.
Critics of government spending claim that the ‘state of government finances’ precludes adequate spending. Or they highlight the risk of inflation, particularly as the UK doesn’t have the level of unemployment Portugal had in 2015 to soak up spending.
Nonetheless, the UK has an urgent need to rebuild key public services, and for infrastructure projects to rebuild our public realm and transition our economy away from fossil fuels. The new government is doing some of this with its focus on renewable energy. But it should do much more to repair the damage of austerity and create growth.
Money is not the issue. It is people and materials that constrain what we can do. As the English economist and philosopher John Maynard Keynes said:
“Anything we can actually do, we can afford.”
