The good, the bad and the ugly: Public investment, public debt and budget surplus in Portugal

  • Pedro Goulart
  • 4 March 2020

"We need to rediscoverer the old discussion on a better State/government to systematically measure the impact and opportunity cost of public investment."

Portugal has been discussing the benefits and costs of running a budget surplus in a context of high public debt. This brings me to the bad and the ugly in my title. High public debt is the bad that needs to be reduced specially as the economy is in expansion. The budget surplus is the ugly as it means the State is taking more than it gives back to society. Sometimes it may be needed, but it is not pleasant or desirable for long. The Portuguese Finance Minister Centeno, who is also President of Eurogroup, has been the surplus major advocate, but the debate has been fierce among economists.

On one hand, Manuela Arcanjo confirmed the positive sign of change sent to the markets;  Joaquim Sarmento reaffirmed the need of a balanced public budget, while Fernando Alexandre alerted about the declining consensus on a balanced public budget. On the other hand, Paulo Trigo Pereira cautions that debt sustainability also comprises social and political dimensions and Alexandre Abreu recalled our historically low levels of public investment; Ricardo Cabral stresses the Government’s aim of restricting costs is misdirected, as economic growth has been the major responsible in the balanced budget; and Ricardo Pais Mamede reminded us a surplus is not needed to decrease debt as long as the economy is growing.

The discussion on how much to spend has focused on macroeconomics, but has turned a blind eye on what we should (not) be spending, often more related to microeconomics. This brings me to the good in the title: wise public investment. Focusing on productive activities, shall we prioritise investment on infrastructures for railroad or air transport? If it is air transport, which is the most adequate location? In spite of the decades of discussion, it has been a debate poorly informed by serious studies – though many studies do abound… And those are important, as sometimes it is difficult to identify what constitutes good expenditure, its location, timing or quantity. For example, the first built highways were very important investment goods, while some of the later were clearly more consumption goods.

We need to rediscoverer the old discussion on a better State/government to systematically measure the impact and opportunity cost of public investment. For example, at the local level, shall we favour price or service level of public transport to increase users and reduce car usage (Melo et al., 2019)? On human capital, this discussion may include some unconventional wisdom as often funding is considered for the general population, but clearly less attention is provided to the State’s own wage structure. Can the State attract, train or retain talent to be productive and to facilitate private sector performance? (Common sense should rule: current expenditures funded by current revenues.)

In spite of good news with public debt fall in 4 percentage points, budget surplus through captivations is not a strategy, and we need to develop it during economic expansion. A better State/government will spend wisely and allow for larger growth in the future and a more sustainable debt.


Note – The (past) US leadership on collective bargaining on Guilherme Dray’s article may seem at odds with my Scandinavian leadership (since 1960 onwards) based on Visser’s database, but it is not.

  • Pedro Goulart
  • Vice-President of the Centre for Administration and Public Policies (CAPP) and Assistant Professor at ISCP-ULisbon