Math 101 for Politicians - brnd.ws
This week the Portuguese government presented the budget for 2012 and I was surprised (not to say shocked) with some of the measures approved. Granted that Portugal is under siege, with the IMF and the European Union demanding hefty budget cuts to reduce public debt, but it’s hard to believe that this budget can solve the country’s short term problems and it will definitely hurt long term growth.
When I first read the budget proposal, there was one question I couldn’t stop asking myself – do our politicians know math? I’m not talking about complex derivatives or even quadratic equations, I’m talking about ratios.
Here is a quick Math 101 for Politicians. While public debt is an absolute number, budget deficit is a ratio. And it’s not just any ratio, it’s one where the numerator (tax revenue) and the denominator (government spending) are tightly related. If you change the denominator, you need to understand the implications of that in the numerator and vice-versa. If you reduce certain types of spending and, as a result, you get less tax revenue, the final ratio will hardly change. The 2012 budget proposal ignores this basic premise. It’s an amateurish exercise, where the government tweaked numbers to achieve whatever deficit goal they were looking for, without considering potential consequences of those changes on both sides of the ratio.
I’ll elaborate. This budget hammers three classes – public workers, retirees and small business owners. How? Slashing government salaries and pensions by 14% across the board, and almost doubling sales tax on restaurants and bars from 13% to 23%. This is not just a sign of weakness from the government by going after those who are easiest to track, but it’s also an exercise of poor math. The government expects private consumption to decline by 5%. Now you do the math. At least 15% of all consumers will be affected by the 14% salary cut and 25% of restaurants and bars are expected to file for bankruptcy. Now compute factors like lower consumer confidence, lower salaries in the private sector as a result of the government’s example and you see how I don’t get the math of this budget.
The saddest thing about this budget is its lack of long term perspective. None of these measures help growth or business owners and entrepreneurs (those who were challenged to be the engines of the recovery). They don’t even send a message of optimism since further cuts are expected in 2013 and now everyone knows who’s going to pay for that. It’s bad math coupled with bad politics. And it’s too sad that it’s my country.