Counter-cyclical response: what government investment could look like

The primary economic policy applied in several countries to manage the crisis has followed the austerity policies described above. However, there are some examples of countries who decided to make a daring stand in casting aside the harshest austerity measures its European creditors had imposed. In this context, the recent experience of Portugal seems to be one of the first examples of this kind of counter-cyclical economic policies.

The aftermath of the 2008 crisis found Portugal at its worst recession in 40 years. Between 2011 and 2014 tens of thousands of businesses went bankrupt, unemployment soared above 17 per cent and hundreds of thousands of young skilled people emigrated, generating a loss of over 4% of the working population.

In 2011 the government of Passos Coelho negotiated with the IMF a bailout following the typical austerity plan of cutbacks to welfare state services, cutting labour costs and pensions and privatising public assets, all measures leading to an aggregate demand collapse. Antonio Costa, by then the Lisbon mayor, signalled these measures as a submission to the neoliberal agenda which was exploiting the nation and expelling capital, rather than attracting it.  

After being elected Portugal’s prime minister in 2015, Anotonio Costa went against the norm by reverting the austerity measures that had affected working hours, holidays and taxes, as at the same time increasing the minimum wage by 20 per cent in two years. Interestingly, this policy was managed while keeping at balance the public spending and even reducing the fiscal deficit. 

Costa’s policy raised people’s income by lowering taxes, especially for those with lower wages, helping to revive the domestic economy and with it lifting public investment and reducing unemployment , while still not overstretching the fiscal capacities. In short, he combined fiscal discipline and income distribution.  

Nevertheless, whereas for many this counter-cyclical response showed that crisis can be overcome without destroying jobs and living standards; for others, Costa merely introduced a few changes in the economy and has had the good fortune of being lifted by the European general recovery, falling oil prices, an increase in exports and the tourism boom.

Therefore, critics argue that the expansion of the domestic demand was small and overcompensated by the amelioration of the balance of payments which allowed for catering to the economy without increasing the external financing need. Further, the lack of a long term investment plan for the country aiming at increasing productivity and the fragility of the banking sector have raised some concerns about the future path of the country.

It is still too soon to understand if these sorts of comebacks of counter-cyclical instruments are successful measures in the face of a crisis. In the case of Portugal, the country might, in the end, have simply benefited from the improvement of its macroeconomic situation thanks to the recovery of Europe.

However, the underlying belief of Costas’ government, namely that by reducing unemployment and increasing people’s income confidence is strengthened, may be the beginning of a new change in the global political economy, as according to his ideas, confidence is a great driver of economic recovery.