Portugal: The benefits of demand-stimulus policies when they come after supply-side policies

The improvement in the situation of the Portuguese economy has been impressive. Since the S ocialists’ arrival to power in 2015, economic policy has focused on stimulating demand (increases in the minimum wage, civil service wages, pensions, family benefits; tax cuts for low-wage earners). This policy has contributed to an upturn in activity, leading to continued fiscal deficit reduction. But it is important to not overlook that this demand stimulus has come after a period of considerable improvement in conditions on the supply side (labour costs, taxation, labour market rules). It is clearly the sequence of supply-side improvement followed by demand stimulus that has been effective : the improvement on the supply side has enabled the demand stimulus to increase production and investment and to attract foreign investment. It should also be noted that the fiscal leeway that the Socialist government in Portugal has used stems largely from the fall in long-term interest rates and therefore from the ECB’s policy.