On Consumption

Reading yesterday's Portuguese Government announcement on new measures ( http://economia.publico.pt/Noticia/principais-medidas-anunciadas-por-passos-coelho-1516383 ) I actually started feeling a chill. For personal reasons (not only for myself, but especially for the persons I really care that live in Portugal) but also for economy reasons. I think that the biggest question now is - how will Consumption hold?

Public servants wages were cut 14%, taxes are raising steadily, public investment is dropping - how will Portugal's GDP behave? Of course there will a contraction - the question is how big will it be? Consumption is key to GDP behaviour!

We shouldn't doubt that it was necessary to break the overheaten cycle of Portuguese Consumption - based on debt and not on productivity. We simply were spending too much above our own capacity - and that would clearly backfire. It was just a matter of time. But this strong break is a very heavy one. If Consumption breaks too hard, it might affect Portugal's (tiny) productive muscle (tourism, restaurants, specialty agriculture,...) and cause severe unemployment, causing social unrest, bla bla bla...

Some people (and see the attached post - http://www.portugalvistodefora.com/2011/10/distribuir-o-mal-pelas-aldeias.html ) argue it would be best to cut straight and fire 14% of public servants - that would enable a leaner and more efficient Public Administration (a much needed one, actually). I think the Government decided not to do it, not only because of civil unrest, but also for concerns on the effects of Consumption and unemployment subsidies - meaning a possibly stronger break on Consumption and no short-term adjustment on Public Spending, as subsidies would be paid still for one year. So, a possibly sharper decrease on GDP (and that means less taxes and higher unemployment) and a negative effect on Government budget evolution. Not a good measure then, though I thoroughly agree on the need to a sharper and smaller Public Administration.

But I am really worried. I feel the break we are applying to Consumption might be to strong and send us to a vicious circle we can't escape. My view on solutions? See it in the next few days.