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Portugal Politics November 2019

Portugal: Risks of instability rise as Costa decides to go it alone

The center-left Socialist Party (PS) led by Prime Minister António Costa has decided not to renew a formal pact with the Left Bloc and the Communist Party that propped up his previous administration over the last four years, although the overall policy direction is set to remain constant. The PS will instead seek to acquire majority support to pass legislation on a bill-by-bill basis. While the minority government, which now governs alone, needs less support from other parties in Parliament thanks to its increased seat count gained in October, the new bill-by-bill strategy raises the risk of instability and a stand-still on reforms. That said, policies supportive of growth should ensure the economy maintains a healthy pace of expansion.

Costa’s new program, which was approved by Parliament on 31 October, revealed the government would aim to cut the public debt to around 100% of GDP in the next four years as it turns its focus to fiscal prudence. Policy proposals to this end include a simplification of the tax system and improving the quality and efficiency of public expenditure and management. The focus on fiscal prudence might make it difficult for Costa’s administration to win the support of far-left parties, however, and raises uncertainties on whether the target can be met if other parties fail to offer support.

Among key policies that have already been pledged include raising the monthly minimum wage—which remains one of the lowest in western Europe—by 25% to EUR 750 by 2023, along with making 10,000 more affordable homes available, which are likely to be backed by left-wing parties.

Costa’s minority socialist government has been praised for delivering a notable turnaround in growth after the Eurozone debt crisis ravaged the economy, while committing to fiscal prudence. More recently, the economy has remained resilient in the face of substantial external headwinds arising from the Eurozone’s broad-based slowdown and a challenging trade backdrop, outperforming the Eurozone average in the first three quarters.

All-in-all, while Costa has strengthened his mandate to govern by winning more seats this time round, the choice to negotiate majority support on a bill-by-bill basis rather than forge a formal pact puts the minority government in a more fragile position to retain power for the entire term.

Consensus Forecast panelists project GDP to expand 1.6% in 2020, which is unchanged from last month’s forecast, and also 1.6% in 2021.

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