The 2011-2014 economic adjustment programme for Portugal : a plausible counterfactual scenario

The 2007 global crisis triggered a severe sovereign debt crisis in Portugal, which led to the need to comply with an Economic Adjustment Programme (EAP) based, among other pillars, on fiscal consolidation. According to our literature review, the economic environment in which the adjustment occurs matters. Also, the composition of the adjustment seems to be relevant to its effectiveness, with expenditure-based plans being less contractionary (or even expansionary) than tax-based plans. Our purpose is to understand, through a VAR model, which could have been the Portuguese economic path without the EAP compared with the actual one. Our results suggest that the austerity programme may have been harmful for the economic activity in the short run, but in a longer horizon it produced a better outcome than the one without the EAP application. In the absence of the EAP, the tax to GDP ratio would be below the actual, with the inverse happening for the primary public expenditure ratio and for the public debt interest rate. Overall, our results support the likelihood of less disciplined fiscal accounts in the absence of the EAP.