‘Austerity by stealth’: How the socialist government in Portugal managed electoral success and deficit reduction

While socialist parties in Europe struggle in times of austerity, the Portuguese Left has found a winning strategy, write Catherine Moury and Elisabetta de Giorgi. Combining discrete austerity measures with some visible anti-austerity ones, they have managed to please constituency and supporting partners alike

Social Democrats have had trouble surviving in many European countries. But the Portuguese Left is alive and well. In the legislative election of October 2015, the Socialist Party led by António Costa succeeded in forming the first Portuguese minority government formally supported by radical left parties: the Left Bloc, the Communist Party and the Greens.

Contrary to what was predicted by many, the government maintained the external support of those three parties throughout the legislature. In October 2019, the PS (Partido Socialista) was the major winner of the legislative election, with 20 more seats in parliament.

The Costa I government managed to do two things at the same time previously thought incompatible: carry out anti-austerity policies while maintaining budgetary restraint

The success of the Portuguese socialists was not only political but economic. The Costa I government managed to do two things at the same time previously thought incompatible: carry out anti-austerity policies while maintaining budgetary restraint.

The first Costa government indeed reversed several public spending cuts, brought the budget deficit to its lowest level in 45 years and regained credibility in the markets and at EU level.

Austerity by stealth

According to some observers, Costa’s success was made possible by a boost in demand and production, and the fall in unemployment associated with the reversals of austerity policies.

In a recent article for the journal South European Society and Politics, we argue that this narrative is not entirely accurate. We show that the deficit reduction and spending increase within budgetary limits were also made possible because the government maintained spending cuts and higher taxes, albeit more discreetly – a strategy that we call ‘austerity by stealth’.

These measures enabled the Portuguese government to claim that it ‘turned the austerity page’ and, by the same token, reduced the country’s deficit in line with the European Monetary Union ceilings.

But what exactly is ‘austerity by stealth’? Let's take an example. During the first Costa government, income and corporate taxes were lowered. Indirect taxes on petrol, sugary drinks, and net worth, however, were raised. Other than for restaurants, the VAT rates that had been increased during the crisis were maintained. There was thus a shift from more visible (income) to less visible (indirect) taxation.

deficit reduction and spending increase were also made possible because the government maintained discreet spending cuts and higher taxes

Another example of how the first Costa government pursued ‘austerity by stealth’ comes from the health sector. In the first years of the legislature, the increase in working hours of all public servants – including those working in the healthcare sector – was reversed. However, the government did not hire enough workers to compensate for this reduction. As a consequence, the waiting time for surgeries increased by several months between the beginning and the end of the legislature.

More generally, our data reveal that spending, in absolute terms, on education, social security and health had been stable since 2013 – when Portugal was still under the bailout programme. Given the growth of GDP during this period, public expenditure as a percentage of GDP declined during the first Costa government, allowing for deficit reduction.

The most striking feature is the decrease in spending on public investment since 2013: in 2018 Portugal, together with Israel and Mexico, had the lowest rate of public investment of any OECD country.

Compromise with radical left parties

But if the socialist government led by António Costa pursued austerity by stealth during its first mandate, how did it manage to maintain the support of the radical left parties? The answer is that the PS signed an ‘explicit written contract’ with the radical left at the start of the legislature.

Under this contract, the PS pledged to pass a series of visible anti-austerity policies while the radical left, in exchange, implicitly accepted the European rules of deficit reduction and thus that the costs of the austerity reversals would be covered by less visible spending cuts and/or tax increases.

An important advantage of the austerity by stealth mechanism is that it allowed for a substantial decrease in bond prices – something of which the radical left is certainly well aware.

In the eyes of the ministers we interviewed, this reduction was made possible not only by the quantitative easing of the European Central Bank, but also by the deficit reduction which reassured investors of the government’s capacity to repay its debt. This allowed real savings for the government, which were used in part to compensate for those hidden austerity measures during the second part of the legislature.

The Partido Socialista pledged visible anti-austerity policies while the radical left implicitly accepted that austerity reversals would be covered by less visible spending cuts and / or tax increases

The Portuguese case shows that ‘austerity by stealth’ was a politically and electorally successful strategy for the socialists. Even though citizens were increasingly aware of the deterioration in public services, notably in health and transport (a central issue in the 2019 campaign), the incumbent PS gained seats and votes in the last election.

Whereas the centre right parties lost 18 seats, on the left, the Left Bloc more or less replicated its 2015 outcome, and the Communists and the Greens suffered significant losses. To some extent, this may be explained by the (partial) relaxation of austerity by stealth in the year prior to the elections, but also by the fact that voters in a country that had just been bailed out placed more value than ever on the state’s capacity to keep its accounts in order.

This article presents the views of the author(s) and not necessarily those of the ECPR or the Editors of The Loop.

Contributing Authors

photograph of Catherine Moury Catherine Moury Associate Professor of Political Science, NOVA University of Lisbon More by this author
photograph of Elisabetta De Giorgi Elisabetta De Giorgi Assistant Professor, Department of Political and Social Sciences, University of Trieste More by this author

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