Lessons from Portugal: A Way Forward from our Fiscal Impasse for U.S. Political Leaders

May 13, 2010 | Budgets & Projections

Inspiration can come from the most surprising places.

Take Portugal, for instance. (Granted, there are major differences between the U.S. and Portuguese economic and fiscal situations.)

Yet, the crisis fiscal package announced today by Portugal’s Prime Minister may suggest a way forward to U.S. political leaders, so far unwilling to make the tough choices needed for our fiscal future and under pressure from citizens who do not appear to appreciate the gravity of our situation.

In announcing Portugal’s new fiscal package of tax increases and spending cuts, Prime Minister Socrates said, according to the Financial Times:

"The world has changed – and how – over the past two weeks," Mr Sócrates said, explaining why he had decided to break recent pledges not to increase taxes.

For the U.S., too, the world has changed – and how. Still emerging from our economic crisis, with unemployment so painfully high and our financial system continuing to move between boom and bust, we cannot “return to normal” – nor should we. Yet what the heck do we do now? We face increasing fiscal pressures as far as the eye can see. Without enough domestic savings, we need foreign creditors to fill the gap. We are living well beyond our means – and have been for awhile. Baby Boomer retirement is about to accelerate, which will put even greater pressure on our precious fiscal resources. Plus, there are basic fairness issues that still need to be addressed. Despite the impressive (and so important) increase in wealth here, many people are looking at a drop in their standard of living. (That may be at least some of what Tea Party supporters are telling us.) And, as the Baby Boom generation warily eyes its prospects for retirement and the youth of America looks at limited job prospects, it is indeed not the world we had expected.

But there is a way forward. We need to come up with a new fiscal path that will allow us to have sustainable growth. In the absence of a solid fiscal (and, by the way, financial) framework underlying growth, we will most likely go from one crisis to another over the next generation. But, politicians will need to put everything on the table to achieve a fiscal recovery package that will be credible – credible to markets but also credible to the American taxpayer. A fiscal recovery package should not be put in place until the economy is on firmer footing (we made that mistake in the 1930s), but its adoption and announcement in the very near future would put us back on course. Because of the magnitude of our problems, it must involve shared sacrifice – but also shared hope. In the end, it is about higher living standards for all Americans.

So, Portugal provides an important lesson here for both the President (who is so far sticking to his campaign tax pledge) and those who have taken the “no new tax” pledge: that an understandable and compelling case should and can be made to the American public that new tax measures must be included in a broader bipartisan fiscal consolidation package.

Our politicians should also take note that the main political parties in Portugal were able to negotiate and agree on the contents of the package. (It does however appear that some parts of the political spectrum were left out, which could make implementation of the package more difficult. For a package to be politically credible, it is always better to include as much of the political arena as politically achievable.)

Inspiration can come from the most surprising places.