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Self-defeating austerity in Portugal during the Troika's economic and financial adjustment programme

José Carlos Coelho

No 2020/0124, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: In 2011, Portugal agreed with the Troika (European Commission, European Central Bank and International Monetary Fund) to implement an economic and financial assistance programme during the period 2011-2014. One of the objectives of the programme was to guarantee the sustainability of public accounts, by setting targets for reducing the weight of the budget balance on GDP. Between 2010 and 2013, the weight of the budget deficit on GDP decreased by six percentage points. However, in that period, there was a colossal destruction of jobs and the unemployment rate grew by five percentage points. In an Input-Output framework, we show the existence of a negative relationship between the unemployment rate and the budget deficit and we revisit the concept of neutral budget balance proposed by Lopes and Amaral (2017), and also we consider the use of alternative fiscal policies and a mix of fiscal policies. In an empirical application to the Portuguese case, in 2013, we concluded that: (i) the balance of public accounts in that year would imply a very high unemployment rate; (ii) the larger the budget balance in that year, the greater the negative impact on the budget balance in 2014; and (iii) the budget balance actually verified in 2013 had a detrimental effect on the reduction of the budget deficit in 2014.

Keywords: unemployment; budget deficit; self-defeating austerity; Troika; Portugal (search for similar items in EconPapers)
JEL-codes: C67 D57 E24 E62 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-eec and nep-mac
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