Portuguese Fiscal Policy Assessment
Abstract: This work tries to do an overview of the Portuguese Fiscal situation ex-post the 2008 financial crisis. There is a short description of the GDP evolution and how it affected fiscal revenues and expenditures: revenues decreased with the crisis and then got up with taxes increasing and expenditures add an upward trend (from 2008-2010, for 2011 everything is projected). Moreover, we compute four types of fiscal balances (total, primary, adjusted from GDP and structural) and conclude that all of them incur a deficit and the huge gap is between the total and primary deficit, showing that the debt service is becoming heavier.
Course: Macroeconomic Policies
Fall semester 2010
Professor: João Amador
Teacher Assistant: Sharmin Sazedj
Diogo Silva no. 9395
Francisco Palmares no. 9647
Gustavo Direitinho no. 9320
Pedro Casimiro no. 9467
This work consists on a fiscal assessment of an European Monetary Union country. The country chosen to analyze was Portugal and the time range goes from 2008 to 2011 (2011 is a projection). The fiscal data (including projections) comes from the Stability and Growth program and Governmental Budget Bill 2011, mainly. The structure starts with a description of the economic activity (mainly GDP and output gap), fiscal revenues and outlays (and their components), and the deficit generated (including adjustments from economic environment and temporary measures, as well as fiscal policy cyclicality). After determining these flux variables, we compute and examine the sustainability of the public-debt stock variable. Finally we make a recommendation to future fiscal policy in order to ensure the sustainability of future generations and to fight the external pressures of foreign creditors. Evolution of the Economic Activity
The description of the economic activity is important because it influences fiscal revenues, expenditures and deficits through the automatic stabilizers mechanism [insofar that a decrease in GDP (increase in unemployment) leads to less transactions and profits (thus less fiscal revenues) and higher unemployment benefits (therefore higher costs)] and all these variables are expressed as percentage of nominal GDP. Looking at graph 1, in 2009 Portugal faced a recession due to the world financial crisis, with a decrease in the real GDP of 2,7%. The components that contributed the most for this descent was the fall of investment and private consumption, with a variation of -11,1% and -0,8%, respectively. The only component that smoothed the drop of the GDP was the public expenditure item that registered an increase of 3,5%. In 2010, the product is expected to rise about 0,7%, driven mostly by the increase in private consumption, investment and net exports. In the following year (2011), GDP is expected to decrease 1% due to austerity fiscal measures, according to European Commission’s forecasts.
Regarding the output gap, since 2009, this indicator was negative. Portugal is, since 2009, producing more or less 2% under its potential GDP and this situation is not expected to change in the next years, which represents a negative situation for the expenditures and revenues. Please look at graph 2. Portugal’s Fiscal Situation
Our data was gathered from Growth and Stability Program of Portugal on March 2010, with some updates for 2011 from the European Commission forecasts and Government Budget Bill 2011.
Evolution of the four fiscal balances
There are four types of fiscal balances. We made the division to observe the impact of interests, economic evolutions and temporary policies on fiscal balance and reach fiscal balance that reflects more the structural / basis policies of the government. All deficits are positively correlated because the revenues account is in all of them: -Total fiscal balance. Simply the difference between fiscal revenues and...
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