Randomly Noted

If there’s one thing Portugal’s government has to do soon, it’s to show it will take steps to trim its bloated budget deficit. The country’s finance minister delivered this message today during a visit to our newsroom, shortly after Standard & Poor’s placed Portugal’s credit rating on “negative” outlook. Fernando Teixeira Dos Santos - with white hair, black eyebrows and an affable, open style – made it plain that the center-left government will take careful yet deliberate steps to tamp down the deficit. It will have a high-profile opportunity to signal its intentions in late January when the prime minister presents a budget proposal to Parliament. It’ll be a tricky exercise in reassuring financial markets by showing “prudence, responsibility and discipline” (as Teixeira Dos Santos put it) while not hindering Portugal’s stimulus-spending-assisted progress toward economic recovery. Also, the ruling Socialist Party lost its Parliamentary majority during September elections and so has to navigate tricky political waters comprising political allies and a feisty opposition. As of this moment, Portugal’s deficit is on track to exceed 8% this year with public debt hitting 75% of gross domestic product. Teixeira Dos Santos contends this is about “average” for Europe on a size-weighted basis; even so, it’s not pretty and stands in contrast with Portugal’s pre-crisis 2007 fiscal deficit of 2.6%. “We were in a good path before the crisis,” he says, noting that his government brought the deficit down from 6.1% in 2005. This track  record gives the government of Prime Minister Jose Socrates a modicum of credibility with financial markets, Teixeira says. Yet it also puts pressure on Portugal to get back on track ASAP and show it hasn’t abandoned the self-discipline it acquired before the economic crisis. So, how to bring down the deficit? Teixeira Dos Santos is adamantly against raising taxes. It won’t happen under his government, he says, so the focus will have to be on spending and economic growth. It’s a mature approach and one hopes politics won’t get in the way. Unemployment was an ugly 10.2% in November and will probably average 9.5% in 2010, Teixeira Dos Santos says. Clearly, then, some level of economic-stimulus spending needs to continue in 2010 even as the country “starts to prepare to reduce deficits.” Portugal’s economy, which contracted by as much as 2.9% this year, is likely to show meager growth of about 0.5% in 2010. Bringing deficits down to EU-mandated levels over the next four years “will be very demanding,” Teixeira Dos Santos concedes. I would bet on his government making its best effort.