Sunday, 29 June 2014

Fiscal Uncertainty

During the European sovereign debt crisis,  lending institutions conditioned rescue packages on austerity measures and growth enhancing measures.  The two main ideas behind this mix were that public spending needed to be reined in to sustainable levels, and that sustainability can ultimately be guaranteed by economic growth.

After a decade of hot money was over, the search for growth and competitiveness in peripheral countries was mostly targeted towards labour market rigidities.  However, the other (and probably more relevant, at least in the eurozone periphery  in 2014-see Hassan and Ottaviano on Italy) side of competitiveness has little do with wages and flexibility, and comes mostly from companies. Creating new companies, making existing ones more efficient, and closing unproductive ones should help with the the latter issue.

All of this requires investment and know how,  and a heavily indebted government is not in the position to provide either. Countries can make long run commitments to producing know how human capital ad ultimately raise productivity, by investing in education and research. This government cut expenditures at every level of education and research. The only possibility in the short run is to attract human, physical, financial and intellectual capital.

Portugal also exhibited a focus on the creation of new enterprises, and innovation in general. Lisbon is currently being marketed as a hotbed for startups, various governmental agencies have stakes in venture capital funds, incubators. The extent to which these measures are actually favouring (successful) entrepreneurship is not very clear, especially without serious valuation efforts.


Another mean of boosting productivity is to retain and attract skilled  individuals and efficient companies, which typically contribute to internal competitiveness and expanding exports (see for example Alfaro and Chen, 2013, also for a overview of recent literature).

Countries achieve the goal of attracting companies and individual through a mix of policies, whose typical ingredients include including tax breaks, tax holidays and other favorable fiscal treatments.

Was the mix implemented by the government optimal? If not, where could it have been improved? Assessing the combined effects of different measures is beyond the scope of this entry, and perhaps not possible at this stage. However, it seems that an area of immediate improvement is that of stability and predictability. Research on FDI (see for example Calvo, 2002) shows that changing taxes too often repels foreign companies.

Ironically, in the first master thesis I supervised at Nova,  Alexandra Lourenço, working for UKTI, a British government agency, was comparing empirically the relative attractiveness to investors of various European countries. Her study concluded that the negative correlation between the number of foreign subsidiaries and the variation of taxes, was strong and more significant than that between subsidiaries and the level of taxes.

How did the government do in this dimension? The combination of announcement, actual laws, and overturning sentences from the constitutional court paints a bleak picture.

Whether because of "unexpected" fiscal slippage, or because of the needs of political compromise requiring a tentative approach, Portugal has seen many variations on its tax rates and base. I will focus here on some examples of these changes, and only on those in which the same items were updated more than once.

As the numerous ball games with the Constitutional Court mostly concerned the governmental sector, I will not mention them here. Except to observe that they forced the government to several unexpected taps into the private sector to recoup income, generating uncertainty in (potential) investors or workers. For example, this increased the number of hikes on Personal Income Taxes, with each hike adding uncertainty in future expectations on fiscal issues.

Before these hikes the Portuguese government granted a special status (non habitual resident) to individuals not working in Portugal in the previous 5 years, and involved in high value added professions. Not only this rate is lower at 20% than the most rates for residents and non residents, but it also insured against the tax hikes which would accompany the bail out. Unfortunately, the government entirely forgot this insurance aspect and charged all exceptional tax surcharges on this tax regime too. Given the small number of individuals enjoying this regime (less than 100 in the country during 2012), revenues must have been low. The cost was destroying the attractiveness of insurance against fiscal uncertainty in a country in the process of raising taxes.

Uncertainty takes many forms, not just that of realised tax rates, but also that of unfulfilled announcements. Turning to social security contribution system, we cannot overlook the infamous TSU blooper of 2012, in which the government announced an increase in the TSU rate combined with a transfer of the burden from firms to workers. Regardless of the potential (but unrealised) effectiveness of the measures, we have to consider the costs of announcing what can be seen as medium-long term increases in labour costs. Unfortunately announcements have no benefits on revenues, but come with a cost on political capital and outside expectations.

Another, more common and less radical, type of excess uncertainty is that of delayed reform discussion, approval, and implementation. We can see  a case of this in the postponement during 2012 of local government taxation reform.

When talking about foreign investment, the main dish of of the menu has to be that of corporate taxation. The government announced an ambitious program of progressive reduction of the CIT rate over several years. It is yet to be seen, whether the announced future rates will be perceived at face value or whether previous twists and turns will be "priced in" and generate unexpectedly low corporate activity and investment, with the ensuing lower tax income, fuelling the need for new changes in the fiscal system.

Nova SBE will be hosting a debate on these and related topics on June 30, in the Ciclo de Debates Alfredo de Sousa: "O Investimento Estrangeiro em Portugal"

you can register at this link

Author: Guido Maretto



References

Alfaro, Laura, and Maggie X. Chen. "Market Reallocation and Knowledge Spillover: The Gains from Multinational Production." Harvard Business School Working Paper, No. 12-111, June 2012. (Revised June 2013.)

Calvo, Guillermo A., "Globalization Hazard and Delayed Reform in Emerging Markets",
Economía, Volume 2, Number 2, Spring 2002, pp. 1-29

Hassan, Fadi and Gianmarco I.P. Ottaviano, "Productivity in Italy: The great unlearning" voxeu.org (http://www.voxeu.org/article/productivity-italy-great-unlearning)

9 comments:

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  4. Getting ex boyfriend back after a breakup,I’m extremely happy that will are living together again. Am Maria 21yr from England, my boyfriend of a 4yr just broke up with me and am 30 weeks pregnant.I have cried my self to sleep most of the nights and don’t seem to concentrate during lectures sometimes I stay awake almost all night thinking about him and start to cry all over again.Because of this I end up not having energy for my next day’s classes ,my attendance has dropped and am always in uni and on time.Generally he is a very nice guy ,he ended it because he said we were arguing a lot and not getting along.He is right we’ve been arguing during the pregnancy a lot .After the break up I kept ringing him and telling him I will change.I am in love with this guy and he is the best guy I have ever been with.I’m still hurt and in disbelief when he said he didn’t have any romantic feelings towards me anymore that hurt me faster than a lethal syringe.He texts me now and then mainly to check up on how am doing with the pregnancy,he is supportive with it but it’s not fair on me, him texting me as I just want to grieve the pain and not have any stress due to the pregnancy.i was really upset and i needed help, so i searched for help online and I came across a website that suggested that Dr Unity can help solve marital problems, restore broken relationships and so on. So, I felt I should give him a try. I contacted him and he told me what to do and i did it then he did a spell for me. 28 hours later, my bf came to me and apologized for the wrongs he did and promise never to do it again. Ever since then, everything has returned back to normal. I and my bf are living together happily again.. All thanks to Dr Unity. If you have any problem contact Dr.Unity now and i guarantee you that he will help you.Email him at: Unityspelltemple@gmail.com ,you can also call him or add him on whats-app: +2348071622464.

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  6. "Podem ainda não estar a ver as coisas à superficie, mas por baixo já está tudo a arder"

    No Brasil: Dilma = vigarista.

    Lula: picareta.

    VOAR em direção a boa educação, também:

    O PT adora PICHAÇÕES:

    O ESSENCIAL:

    A educação (e a ARTE), como desejava Cristovam Buarque ainda no ínicio desse século com um projeto fabuloso, abortado pelo populista & vigarista Lula em seu 1º governo, tinha que ter sido PRIORIDADE. Não foi. Eis aí o PeTê.

    Sim, é hora de se livrar dos trastes. Mas também dos TRASTES DE suposta ESQUERDA.

    E quanto as questões políticas atuais no Brasil, discutidas, só sei que o primordial é o seguinte:

    o LULOPETRALHISMO (muitas vezes “esquecido” de crítica dos blogs…):

    Lula é um perigo para a volta à normalidade, Lula é o atraso e o prejuízo. Com um papo rocambolesco. Engana-trouxa. Retrógrado, nivelando tudo por baixo. Um homem mentiroso VIGARISTA, PeTralha e Picareta. Amado por inteligentinhos caviares (ditos """intelectuais"""): de araque, como Chico Buarque.

    Lula é incompetente, e foi incompetente quando apostou naquela mulher ignorante em ECONOMIA cujo nome é Dilma Rousseff.

    O PT tem orgulho de se dizer de esquerda (sentindo com essa identificação pessoal uma vaidade de se "acharem"). Mas PT é pseudo-esquerda, certamente. Hipocrisia publicitária e pura propaganda.

    O PT (sobretudo o Lulismo) já está fazendo Campanha (infiltrado nos blocos de Carnaval, disfarçado).

    PT fala que PICHAÇÃO é ARTE. rssss.

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