“Tax consolidation is inevitable”

“You can call it tax consolidation if you don't like the term austerity, but the truth is that it really needs to happen”. The statement was made to journalists at an online press conference by economist Nouriel Roubini, a professor at the New York University Stern School of Business, shortly after his participation in the Warm-Up event for QSP Summit 2021, a management and marketing summit due to take place on 01 and 02 July in Porto and Matosinhos, and which Galp is sponsoring.

The economist, who gained fame for having predicted the sub-prime crisis in 2006 when he warned the IMF of the imminent recession due to the credit bubble in the real estate market, provided this answer to the question posed on whether greater austerity was foreseen for Portugal. “Portugal, Italy, Greece and Spain have high levels of indebtedness and need to include tax consolidation in their budgets, due to the fact the emergency measures in force will be dropped on a gradual basis and budgets will need to be reviewed in the medium term to ensure their sustainability isn´t compromised – so in other words, austerity is inevitable”, he explains. He is of the opinion that the best way of reducing public debt is to boost strong economic growth, but this only happens with deep structural reforms geared to making debt sustainable. “I´m not saying this needs to happen in the short term, but a certain degree of tax consolidation is necessary in the medium term, and the country will have serious problems if this doesn´t occur”, he says.

While particpating in the QSP Summit Warm-Up session, Nouriel Roubini said that Portugal was in a strong position before the pandemic, with a good rate of economic growth and job creation and a very low unemployment rate, and had achieved a positive budgetary balance after so many years of deficit. “However, the arrival of the pandemic hit the country hard, with GDP dropping 8%, - it is estimated that the unemployment rate will reach 9% this year - and there are fears that two thirds of the 260,000 jobs created in the last four years may disappear between 2021 and 2022”, he adds. He further stated that due to the fact a large part of GDP is related to tourism, and that this sector has been hard hit, both directly and indirectly, this is a tragic consequence that will lead to an increase in poverty. “Furthermore, the country opened up the economy too soon and was then subjected to a powerful third wave. The response to the first wave of the virus was successful, with the spread of the virus under control, but the measures taken to reopen the economy were precipitated, particularly in November and December, and we now have this new wave resulting in extremely restrictive confinement measures and that will lead us into another recession”, he says.

EMINENT CREDIT CRISIS

Drawing a parallel with the situation in Europe, the economist also says that many companies will go bankrupt in the event of a serious depression, and not just SMEs, but major companies too. Due to the fact the European financial system is largely bank-based, bank losses will be huge, capital will be reduced as a result of so-called non performing loans (NPL) and there will be a credit crisis. “The ECB is lending money at lower rates to avoid this credit crisis, but if a large number of companies go bankrupt, then NPLs will increase accordingly and some banks will become insolvent due to a lack of sufficient provisions,” he says, adding that “I don´t mean this is a global financial crisis, like the previous one, as it could be a eurozone problem, but when NPLs grow and financial institutions get into trouble, there will be a run on banks”.

However, the outlook is not all bad for the country, which is why he ended his presentation by saying that Foreign Direct Investment (FDI), which was significant before the crisis, still is. He says that the country has the infrastructure and is a democracy, which favours investment, meaning that Portugal remains a good choice for investors, be it in industry, services or tourism. “Of course there are challenges, but the prospects for the country, in line with the ongoing structural reforms, are good in the medium term. There are many people who want to come and visit and set up business, industry and jobs here. This is a sign that investors, not only in Europe but also in the United States, believe in this country”, he concludes. Nevertheless, he still makes a point of sending the Government a warning: “the weather is overcast in general, but with the right policies, with the right reforms, I believe this country of hard-working people has good prospects in the medium term”.