"The Government machine is not handed over to the Minister of Finance" – The Economic Journal

"The Government machine is not handed over to the Minister of Finance" - The Economic Journal

The Stability Program presented by the Finance Minister essentially serves to demonstrate to Brussels that the economic and financial policy pursued by Portugal ensures the balance of public accounts, says the Deputy Minister of Economy, Pedro Siza Vieira. For this reason, the policymaker does not value much the downward revision of growth targets. On the complaint that the businessmen make regarding the excessive weight of the Minister of Finance in the Government, Siza Vieira guarantees that the governmental machine is not delivered to Mário Centeno and that the minister of the Economy does not sit in second plane.

How do you interpret and justify the downward revision of the economic growth forecasts in the Stability Program of 1.9% of GDP?

The Stability Program (EP) is not a standard instrument. It is only to explain to the European Union what, in keeping with the policies that are already decided, will happen, predictably, over the next four years. For example, assuming there will be no policy change, it is relevant to see how much public investment costs each year and what impact they have on State Budgets and public accounts over the next few years – because we have gone from 4.3 billion euros of public investment per year to 6,400 million euros in 2023. But on the public accounts in 2018, it is true that they were better than we had estimated. This has a forward effect, which also makes us think that we can, even with less economic growth, which normally has an impact on lower revenues, yet still maintain the public deficit target. The other issue is whether or not it makes sense to review growth projections for the economy given the information we are now getting.

And does?

The Ministry of Finance thought it was. They have certain models in which they work with forecasts from various institutions. They themselves make the models for predicting economic growth and, given some slowdown in external demand, they think that a lower growth of the economy should be projected. That is what the EP explains. It is not worth giving more importance to the EP than what it actually has. It is only to show the European Union that the public accounts are in a stable situation, that there is no risk and that in the medium term we can think of a reduction of the public debt to 100%.

That was what was designed …

The forecasts in this EP will be influenced by changes in public accounts policies. For example, in a future electoral program or in a future government program, we can say that we want to strengthen public investment. Already last year we had said that we understood that there should be a further reduction of the IRS and, therefore, we estimate that this can lower public revenue by 200 million euros. But someone make a different decision and lower the IRS even more. All of this will have an impact.

Another example: if we were to think about the increase in the salaries of teachers and other special careers in the amounts that would result from meeting the demands of the unions, surely the accounts would not be those. Either we let the public debt grow or we would have to cut other expenses and raise taxes.

These are the issues that need to be addressed. Therefore, that EP completes a cycle. We came to the next government in a stable and sound financial situation, and we regained room for maneuver to make other choices. What we say is that choices have to be consistent with goals that are claimed for the future. Do we want to continue to reduce public debt because it is still too high? Do we want to invest more in the quality of public services? Without raising taxes you can not do many more things.

The moment the Portuguese economy is going through is sui generis. It enjoys international popularity, there is a large influx of tourism and exports continue to grow. Has the Portuguese Government been able to grasp and optimize this moment?

I have no doubts about that. One of the important things for the growth of our economy is that we can strengthen private investment. Three years ago, we had very low levels of private investment. The companies were very undercapitalized and with high levels of indebtedness. We have created tax benefits for investment and corporate capitalization, which they are enjoying very significantly. We have launched the Capitalize credit lines to get financing to SMEs at a reasonable price. At that time, Portuguese SMEs were financing at an average interest rate of 8% and thus we were able to give companies the tools to better take advantage of the business cycle. Three years ago, the level of financial autonomy of companies, that is, their share of their total assets, increased to 38%, which is on average for the European Union. The level of profitability of the companies' assets is 9%, when before it was 3%. The level of corporate, family and state indebtedness has dropped. This is another very important note. And it is the first time in recent decades that the growth cycle of the Portuguese economy is not accompanied by a greater indebtedness of companies and families. Corporate debt has fallen from 130% of GDP to less than 100%. Household debt fell to 70% of GDP.

Is not reducing the indebtedness also due to a decrease in the flow of credit granted by banks?

Surely. According to the report of the mission structure for the capitalization of companies presented in June 2016, it was noted that we were aware that the flow of credit from the banking system of companies would not grow.

We knew that what had made business growth possible in the first decade of this century was that companies were indebted to finance their investments, and that was not going to happen again, nor was it healthy. It is not healthy that companies only make investments with indebtedness because later they have to pay it with interest. We had to increase equity and the financial autonomy of companies. A very important measure was the extension of the deduction of retained and reinvested profits. That is, companies that have profits, instead of distributing them to their partners, can reinvest them with tax deductions. At the end of last year, the European Commission published its tax survey and concluded that Portugal has the second most favorable regime for business investment in the EU.

At the moment, Portugal has the most favorable regime for financing by equity. In the State Budget for 2017, Article 41-B of the Tax Benefits Statute was approved, setting the conventional remuneration of public and social capital at 7% per annum for each capital increase, whether by cash inflow, reinvestment of profits or conversion of capital stock. This means that the State, through IRC deductions, is supporting companies that increase their share capital. Knowing that banks will give less credit to the economy, we must see that other sources will appear. They have appeared and that is why business investment in this first quarter even accelerated over the previous quarter.

Is the fabric of SMEs still fragile and underdeveloped or is it modernizing?

Part of the good moment of the Portuguese economy is due to the enormous dynamism of our companies and entrepreneurs. They are very close to the customers, to develop products, to buy machinery, to choose the location of the companies and they do this directly. There is a process of change. The new generations are clearly more qualified, more attentive to the need for professionalization of management, investment in human resources and innovation. The whole secret of the success of the Capitalize program was the dialogue with the companies. It was working with companies that realized which measures could have the greatest impact on increasing capitalization and corporate productivity. Exporting companies complained a lot about the issue of VAT on imports. When they imported raw materials, they had to pay VAT, transform the raw materials and then re-export the finished products. Only then could they recover the VAT they had paid on the import of the products, sometimes with relatively long cycles. We were able to realize that it was possible with some investment by the Tax Authority (TA) in their IT systems, to build a system in which VAT was no longer imported.

It seems a simple thing, but from the point of view of the treasury of the companies yielded 400 million euros per year.

Several businessmen warn of the excessive weight of the Minister of Finance in the Government apparatus. Portugal needed a stronger Economy team and less Finance protagonism? Or is it easier for a government leader to hand over the government machine to the finance minister?

Let me contradict that statement. The Government machine is not handed over to the Minister of Finance. It is the same as saying that the machine of an industrial enterprise is delivered to the CFO. I think we have to realize that the extremely high level of indebtedness in our country, especially Public Finance, has forced it to be especially rigorous in the management of public accounts – but by reconciling this with economic growth and job creation with recovery of household income . We lowered the IRS by 1.1 billion euros. We were able to replace the wages and pensions that had been provisionally eliminated in the previous year and resume service counting time for all public administration careers. All of this is a set of requests that increase spending and increase revenue, and which have to be carefully managed so as not to unbalance public finances. This means that the Finance team must have a very attentive and permanent view of how public finances are moving forward. But I'd like to say that I feel no less a member of the Government than any other. On the contrary, I think that what the Ministry of Economy team has done during this mandate is to put itself at the service of companies. The programs I mentioned are from the Ministry of Economy, which had a true, measurable impact on the situation of companies. If today we have improved financial autonomy and reduction of indebtedness, if we have increased profitability of companies, are measures that the Ministry of Economy proposed and that had translation in the State Budget. And I do not have a secondary vision of my function.

Article published in issue no. 1985 of April 18 of Jornal Econômico

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