“The rule is, jam to-morrow and jam yesterday – but never jam to-day.”

Lewis Carroll

Since 2010, the UK has been experiencing the effects of austerity: low growth, stagnant incomes, failing public services and rising poverty.

And in the 2019 general election during which it seemed that both major parties were planning to spend more, we have returned the Conservative Party – now purged of its more moderate elements – with a large majority and on a manifesto which constitutes a licence not to spend.

Is there any way to end austerity?

Though not an exact parallel, and not illustrating a perfect solution, Portugal’s recent history shows that the UK is not doomed to permanent austerity:

• Austerity was harsher in Portugal than in the UK and the results were worse;
• But Portugal determined to end austerity – with impressive results; but
• There has been a cost: investment has suffered.

Austerity was harsher in Portugal and the results were worse

Portugal is a member of the Eurozone. This means that it does not have – of course – its own currency, nor its own central bank to bail out the banks in the way that the UK does. When the Global Financial Crisis hit, this mattered, because Government debt levels, which had previously been close to, though not absolutely compliant with, the Maastricht criteria started to rise, and it was not within Portugal’s gift to demand that the European Central Bank (ECB) respond on its behalf.

As a result, Portugal was forced to accept a rescue package from the ‘Troika’: the EU, the IMF and the ECB. As the Financial Times put it,

“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 Global Financial Crisis, was plunged into a second and deeper recession.

The result was an extraordinary level of pain for ordinary Portuguese citizens. Unemployment rocketed, wages fell (and low pay increased dramatically), and public services suffered.

As the FT reported,

“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 per cent, leaving more than 40 per cent of under-25s out of work. Hundreds of thousands of mainly young, skilled workers, emigrated — a loss of more than 4 per cent of the working age population between 2008 and 2016.”

But Portugal determined to end austerity with impressive results

The New York Times describes 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.”

And the Financial Times points out that this was highly controversial at the time,

“Portugal’s centre-left government took a different course. 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. ‘People were highly sceptical about our economic policies,’ Mr Costa [Prime Minister António Costa] tells the Financial Times. ‘But we have shown that it is possible to raise incomes, lift private investment, cut unemployment and still have sound public finances.’”

The results have been hugely impressive: our analysis shows how critical the decision to end austerity was to restoring growth.

(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.

Here is unemployment: it has now fallen to below the level it was at prior to the Global Financial Crisis.

And here is the impact on incidence of low pay, which was one of the major casualties of the austerity programme:

And as the New York Times, explained, the results are not just in the numbers: Portugal has a new-found 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.

‘The actual stimulus spending was very small,’ said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. ‘But the country’s mind-set 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.

There Has Been a Cost: Investment has suffered

Not everything in the garden is rosy, however. Although the budget deficit, which peaked at 11% of GDP during Portugal’s 2010-14 debt crisis, has been almost eliminated under Costa, that has come largely at the expense of public investment. Effectively, the government felt that is 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 fear that this lack of investment is storing up problems for the future. As Reuters reports,

“A recent report by the International Monetary Fund found Portugal actually had net public investment of about negative 1.2 percent 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.”

What Lessons are there for the UK?

In the UK, our freedom of action is greater – we have our own currency and our own central bank, which gives us far greater freedom around borrowing and spending and even money creation. In this respect, anything Portugal can do, we can do better.

There is no reason why we too should not U-turn away from austerity and take the five, relatively simple steps we need to safeguard our post-war social contract.