Daily Austerity Watch (3/31/11) — Portugal, US Budget

Portugal: Forget S&P, Moody’s, the IMF or the EU.  The best explanation of Portugal’s financial predicament is on the website of Portugal’s Tourism  Office even though it was not planned that way.

We sometimes allow ourselves to be overcome by a sense of melancholy that we can’t explain. This is the nostalgic sadness that we call saudade and is a distinctive feature of the Portuguese.

Judging from the recent news, the Portuguese are probably feeling more saudade than usual.  Last week, Prime Minister Jose Socrates resigned after failing to get support for his austerity policies.  A snap election may be called at the May, which is making capital markets investors understandably nervous. It’s hardly surprising that Portuguese bond yields are at all-time highs because a bailout is now more likely.

Now comes the icing on the cake:  the economy is in worse shape than originally thought.  The budget deficit for 2010 was 8.6% of GDP, a significant revision from earlier estimates of 6.9%.  Officials blamed the revision on accounting changes.

On the bright side, Portugal maintained its budget-deficit target for 2011 at 4.6% of GDP.  All bets are off, of course, if politicians succumb to popular sentiment and scrap austerity altogether.

US Budget :  Remember how Washington pundits were predicting that a government shutdown was a foregone conclusion?  They are changing their tune.

According to the Washington Post,  Democrats and Republicans are at least working from the same playbook.   The two parties are negotiating an agreement that would slash $33 billion from federal spending and avert shut down of the government.  If approved, it would be the biggest spending cut in U.S. history.

“The two sides have already agreed on $10 billion in cuts; now, the House and Senate appropriations committees are searching for an additional $23 billion to extract from the budget, according to lawmakers and aides from both parties,” the paper says.

Before people start slapping themselves on the back, let’s consider the downside.  Such a mammoth spending cut would require the layoffs of tens of thousands of workers both in the government and by private contractors.   The lucky few who get work may be forced to accept lower wages because the supply of qualified applicants is so huge.  Meanwhile, most of the newly jobless may have to wait months to find new work because job growth continues at an anemic pace after hitting a 29-year low during the Great Recession. Private companies will find it very difficult to replace the business that they will lose from the government.

In other words, the cure being proposed for the country’s fiscal woes may be worse than the disease.

–Jonathan Berr