Should we let the baby grow?

Portugal is entering an era of political debates that precedes the upcoming elections. At this point, issues related to the public debt start to appear. But what is public debt? What does it consist of, and how much is it in Portugal?

Public debt measures the indebtedness of a country’s general government. Deficits come up when the government revenues are not enough to cover its expenditures. The government then appeals to creditors (such as individuals, companies, banks), leading to the building up of public debt.

Public indebtedness, if well managed, may allow for the expansion of society’s well-being and productivity. The money raised from the debt can be used in current expenses, such as the wages of professors and health professionals, or invested in new infrastructures (such as hospitals and schools) that will serve these and future generations. Furthermore, public indebtedness is essential to enhance the technology of a country. The efficiency and productivity provided by this improvement will generate additional wealth. On the other hand, if the debt increases for reasons that will not benefit the country’s productivity it could turn out to be a waste of money, with the interest induced by the debt not compensating for the short welfare generated.

The alarming consequences do not stop there. If creditors feel that the country’s credibility is weakening, stopping to believe that it will be able to pay back the debt, the interest could exponentially increase, with the government ability to pay the debt becoming smaller and smaller. This is what economists call a “self-fulfilling prophecy”.

So, public debt is like a baby. If you feed him, he grows, and it could bring you a lot of happiness and advantages. However, you must control what the baby eats. Otherwise, he could eat more than he needs and turn into an enormous unhealthy baby, very hard to bear. The Portuguese baby, the one we listen to in the current debates, is weighed, at the time, at 135,2 % of the GDP, which is, unfortunately, not healthy anymore. (PORDATA, 2021)

Experts affirm that a healthy debt, one that provides well-being to the population without compromising future generations, should be below 70% of GDP in the case of developed economies, this is the example of Ireland and Germany that presented, in 2019, a public debt of 58,8% and 59,8%, of the GDP, respectively. (EUROSTAT, 2021). Portuguese debt has long passed this limit.

There are some divergencies about how to deal with this unhealthy debt. Some of the parties argue that the best solution could pass through an issue of new debt, with lower interest, and pay immediately the one that has taken thunderous dimensions. This could be a solution while interest rates are kept low by the ECB, but may not be enough to solve it in the long-run if the Central Bank decides to raise them. Further, there is a possibility of making the State lighter. In other words, some people defend that it is necessary to reform the public system, arguing that it is becoming more and more inefficient. They say this would not mean less investment or non-existent public services for the population but rather a reallocation of the resources and better management of them.

Therefore, it is urgent to start thinking about what we can do to put this baby healthy again. What do the parties involved have to say about this? Which plans lead to a promising future and turn this debt, the Portuguese baby, supportable to future generations? It would be advantageous for everyone if these were some of the questions raised in the upcoming parliamentary elections.

References

Jornaldenegocios.pt. 2021. Opinião – Jornal de Negócios. [online] Available at: <https://www.jornaldenegocios.pt/opiniao> [Accessed 18 December 2021].

Pordata.pt. 2021. Administrações Públicas: dívida bruta em % do PIB. [online] Available at: <https://www.pordata.pt/Portugal/Administra%C3%A7%C3%B5es+P%C3%BAblicas+d%C3%ADvida+bruta+em+percentagem+do+PIB-2786> [Accessed 18 December 2021].

Romano, P., 2021. O bê-á-bá da dívida | Fronteiras XXI. [online] Fronteiras XXI. Available at: <https://fronteirasxxi.pt/o-be-a-ba-da-divida/> [Accessed 18 December 2021].

SIC Notícias. 2021. Polígrafo SIC. [online] Available at: <https://sicnoticias.pt/programas/poligrafo> [Accessed 18 December 2021].