The Unassuming Economist

A new IMF report says that “Portugal achieved an impressive consolidation of its public wage bill during the adjustment program, with large efficiency gains and savings generated in the education and health sectors. As in many European countries, these efforts relied on blunt but quick measures such as across-the-board attrition and temporary wage cuts, which could not be sustained over the medium-term. From 2015, these measures were reversed or unwound, and structural reforms lost momentum. Going forward, Portugal projects a large reduction in the wage bill from 2017-2021 (-1.3 percentage points of GDP) that needs to be supported by specific reforms. This will prove challenging, as wage and public employment policies show evidence of procyclicality. To prevent adverse impact on public service provision, targeted reduction in public employment will require adjusting employment levels across sectors. Finally, containing public compensation will require structural wage measures to gradually address large public wage premium relative to the private sector.”