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Concerning Fiscal Policy

António Rebelo de Sousa


António Rebelo de Sousa
In a democracy, there are always different perspectives on fiscal policy, and so it would be very useful to give a summary of them, in order to contribute to an all-encompassing overview of what may be at stake and therefore to an in-depth reflection on current issues.
A first perspective is the one that, to some extent, is inspired by theses proffered by supply-siders, which favour tax cuts, based on the assumption of ex ante equality between savings and investment and, therefore, the automaticity of converting a significant portion of disposable income into increased savings, which manifests itself in reproductive investment, with positive inductive effects on economic growth and the level of employment.
This perspective is also based on the Laffer Curve, leading many authors to defend the increase in tax revenue induced by the decrease in taxes.
When this perspective is adopted, it is important not only to have a clear idea of state revenue that may have to compensate for drops in tax revenue, but also to understand that, as Keynes said, equality between savings and investment does not occur automatically, but rather ex post, i.e., at the end of a certain period of time it is also true that there have been few consistent studies for the Portuguese economy on the determination of the «upper peak» of the ascending branch of the Laffer Curve, which does not allow unquestionable conclusions to be drawn on the impact of tax cuts on tax revenue.
A second perspective is that, as long as there is some room for manoeuvre in the field of increased public spending, fiscal policy should necessarily be expansionary in order to meet pressing needs and promote growth and employment.
As the author of these reflections is impartial in this matter, since he considers himself a follower of neo-Keynesianism, he nevertheless believes that everything depends on the economic, political and social situation that is being experienced.
We are going through difficult times, faced as we are with a «supply shock», with shortages in the production of energy and raw materials (and of many food products), blockages in production and distribution chains, the remnants of a pandemic that is still affecting us and, finally, a war in Europe.
The state of affairs makes it advisable for us to adopt, as an analysis methodology, what I call «real options», that is, a perspective that enables maintaining, for the future, the highest possible number of degrees of freedom, without compromising the years 2024 and 2025, that is to say, guaranteeing «budgetary capital buffers» that ensure room for manoeuvre if the political and economic situation worsens, in the meantime, on an international level.
Hence the understanding that fiscal policy must be cautious, with a core concern for rigour in Public Finances and the goal of containing deficit and reducing the burden of Public Debt in GDP.
Or rather, it will be necessary to reconcile the expansionism of the possible with maintaining the credibility of the Portuguese State in the management of Public Finances.
Finally, one last consideration. For a long time, conventional monetary policies always worked when faced with inflationary processes resulting from «demand shocks». The mechanism of raising interest rates encouraged savings and helped to reduce consumption. But, when the inflationary process is the result of «supply shocks», there may still be a shortage of supply that more than offsets the reductions in demand induced by interest rate increases, while the inflationary process will continue, with the aggravating factor that it may eventually be joined by a recessionary crisis.
And this may be the problem we will be facing in the near future.
In short, these are some of the reflections we should make on the current situation, since Economic Science, as the Social Science it additionally is, integrates several subsciences, from Micro to Macroeconomics and Strategic Planning. These subsciences have areas of decision-making autonomy, but they are all part of a «central theoretical corpus» that has as its mainstays the concern with lack of resources, the indispensability of their efficient management and the maximisation of the General Welfare.
And it is in the quest for the permanent improvement of scientific contributions and serious and objective enlightenment of spirits that economists should place the emphasis of their contribution to the future of the community, in general, and their country, in particular. 
Post scriptum: I would like to congratulate Villas&Golfe, in the person of my dear friend Dr Paulo Martins, on another anniversary and for the excellent work developed over many years.
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