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Portugal - Assessing the Risks Around the Speed of Fiscal Consolidation in an Uncertain Environment

  • Stéphane Sorbe


This paper illustrates possible trade-offs between two different fiscal consolidation strategies in Portugal: sticking to the nominal fiscal targets in the EU-IMF programme or allowing automatic stabilisers to work, while sticking to the structural primary deficit targets implied by the programme. The analysis is based on stochastic simulations in which random shocks affect the main economic variables in the framework of a small macroeconomic model. The model captures the mutual interdependences between the fiscal position, financial conditions and activity and notably the impact of public debt developments on investors’ confidence and interest rates. Results suggest that under the large fiscal consolidation programme that is currently implemented, both fiscal policy strategies considered would in most cases result in sustainable debt dynamics. Both strategies also entail risks, but of a different nature: the risk of a deeper recession if sticking to nominal targets and the risk of higher debt if letting automatic stabilisers play. Sensitivity analyses show that these risks could be reduced by stimulating potential growth through structural reform and by choosing “growth friendly” fiscal consolidation instruments that have lower multipliers. By reducing recessionary risks, a small fiscal multiplier also increases the relative benefits of sticking to nominal deficit targets, while the benefits of automatic stabilisers are larger if the multiplier is high. This Working Paper relates to the 2012 OECD Economic Survey of Portugal ( Portugal: évaluer les risques autour du rythme d'assainissement budgétaire dans un environnement incertain Ce document illustre les compromis possibles entre deux stratégies de consolidation budgétaire au Portugal : respecter les cibles budgétaires nominales du programme de l’Union Européenne et du FMI ou laisser jouer les stabilisateurs automatiques tout en respectant les objectifs de déficit structurel primaire impliqués par le programme. L’analyse se fonde sur des simulations stochastiques dans lesquelles des chocs aléatoires affectent les principales variables économiques dans le cadre d’un petit modèle macroéconomique. Le modèle tient compte des interdépendances mutuelles entre la situation budgétaire, les conditions financières et l’activité, et notamment l’impact de l’évolution de la dette publique sur la confiance des investisseurs et les taux d’intérêt. Les résultats suggèrent que, dans le cadre du programme d’assainissement budgétaire important qui est actuellement mis en oeuvre, les deux stratégies budgétaires considérées se traduiraient dans la plupart des cas par une dynamique d’endettement soutenable. Ces deux stratégies comportent également des risques, mais de nature différente : le risque d’une récession plus marquée si les cibles nominales sont respectées et le risque d’une dette plus élevée en laissant jouer les stabilisateurs automatiques. Les analyses de sensibilité des résultats montrent que ces risques pourraient être réduits en stimulant le potentiel de croissance de l’économie par des réformes structurelles et en choisissant des instruments de consolidation budgétaires favorables à la croissance, c’est-à-dire avec de plus faibles multiplicateurs. En réduisant les risques de récession, un multiplicateur budgétaire faible augmente aussi les avantages relatifs de respecter les cibles budgétaires nominales, tandis que les avantages des stabilisateurs automatiques sont d’autant plus grands que le multiplicateur est élevé. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Portugal, 2012 (

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 984.

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Date of creation: 19 Sep 2012
Date of revision:
Handle: RePEc:oec:ecoaaa:984-en
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