Insane Portuguese political manouevering

I spotted a brief news item at the newspaper stand. And I think that the Portuguese Government has gone entirely insane.

At least, if I\’m understanding what they\’re doing properly.

They are increasing worker social security payments (our employees\’ national insurance) from 11% to 18% of wages.

No, that\’s not the insane bit.

They\’re reducing the employers\’ part of social security payments from 23% to 18% or so.

That\’s not insane either.

But to do both at the same time is insane.

For both are part of the labour share of income (the labour share of income being wages and salaries plus employer paid taxes on employment). They\’re both coming out of the same pot. OK, the changes in rates aren\’t quite symmetrical.

But the perception is that employees pay one and employers pay the other. So how politically insane do you have to be to increase the amount that the workers think they are paying, decrease the amount the workers think the employers are paying, while actually making no damn difference at all to the fact that the workers have been paying it all all along?

16 thoughts on “Insane Portuguese political manouevering”

  1. Monaco gets away with an employers payroll tax of 35% of wages (10% or so employees), and still gets to be called a “tax-haven”. Sweden is about the same level combined. There’s a lesson to be learn’t from that. Not sure what it is or that it’s applicable to anywhere else, but govt of Portugal obviously haven’t been taught.

  2. I suppose it’s a trick to get round the stickiness of wages, to encourage the labour market to clear – they hope that headline salaries will stay as they are, so gross salaries (what it costs to employ someone) will fall.

  3. To simplify what PaulB said – it is an across-the-board cut in wages that doesn’t fall foul of breach-of-contract between employers and employees.
    Not at all insane, but cleverly sneaky.
    A means of achieving an effective devaluation of the Portuguese currency while remaining within the Eurozone.

  4. Paul is right. In the long term we can see that the cost is born by labour, but it takes time (years) for changes to work their way through.

    This is why, for example, recent changes to UK NI which reduce the cost of low paid/part time people have not yet led to any increase in the wages of low paid/part time people. And if a government announced a scrapping of employer payroll taxes tomorrow, we would not see everyone get a commensurate pay rise the next day.

    If the desire of the Portuguese government is to decrease the cost of employment whilst retaining the level of tax take then, as a short-medium term measure, this seems entirely sensible.

    Tim adds: No, I think you’re both missing my point.

    Employers or employees NI don’t make any difference at all. They both come from the same pot: total labour costs. So to move from the one which labour doesn’t think it is paying, employers’, to the other which labour does think it is paying, employees’, seems insane to me.

    I agree that if the total amount of NI being paid changes then that does matter. But that’s not what I’m pointing at.

  5. “Employers or employees NI don’t make any difference at all.” You mean “shouldn’t” rather than “don’t”, don’t you?

  6. “They both come from the same pot: total labour costs”

    “I agree that if the total amount of NI being paid changes then that does matter”

    What will change is not the total amout of NI.. but the total of the aforementioned pot.

    Workers (existing) will be worse off, employers will be better off, and the government will see no change.

    The desired outcome is, presumably, that the employers spend this money on useful things. It’s a wage cut, with the proceeds given to the employers to spend as they say fit (one step up, I think, from a simple tax rise where the government spends the proceeds).

  7. @ The Thought Gang
    “The desired outcome is, presumably, that the employers spend this money on useful things.”
    It is a cut in employers’ costs with the hope that they will be able to cut their export (local) prices and still say solvent thereby increasing exports (decreasing imports from foreign competitors) and local employment.

  8. IF it were organised so that take home pay were unaffected, it might help convince more people that its not the employers paying “employers” NI

  9. Tim is of course assuming that 1) wage rates normally take into account employers’ payroll tax liabilities, so are lower than they would otherwise be, and 2) what is effectively a transfer of some of those taxes to the employee would result in employers raising wages to compensate. If both of those are true then this measure would have no effect whatsoever. However, I would guess that the Portuguese government is expecting that 2) will not be true, so this is a concealed wage cut, as John77 says.

  10. Y’all both right & wrong.
    Long term makes no difference because, as Tim says, the money’s from the same pot. Short term it’s a transfer from employed to employer.
    Question really is, how an already seriously pissed off Portuguese is going to take it. Violently, possibly.

  11. bloke in spain

    It makes no difference to the Portuguese exchequer. But it does make a difference to both employers and employees.

    Tim’s assertion that employees pay employers’ payroll taxes is only true if wages adjust to changes in those payroll taxes IN BOTH DIRECTIONS. If they don’t, then payroll taxes can’t possibly be fully borne by employees, do they? In which case this is a wage cut, as I said.

  12. I think that’s what I was saying. In the long term wage rate movements should cancel it out. Unless Lisbon slaps some more tax on co’s separate them from their bit.
    Tim’s correct in “Insane Portuguese political manouevering” The short term benefit to the change in the balance will be outweighed by the grief it’s likely to cause. Iberians are not happy bunnies, currently.

  13. Employers or employees NI don’t make any difference at all. They both come from the same pot: total labour costs.

    In the equilibrium state that is true. But in the short term, it’s not total labour costs that are constant, but headline wages. It takes time to achieve equilibrium.

    This difference in economics between the short term and an eventual equilibrium is what Keynes was talking about when he famously said “in the long run we are all dead”. I recall being disgusted with Hayek when he pretended (I suppose) to misunderstand it. Thatcher misrepresented it too, in a conference speech, but she (I suppose) was not pretending.

  14. It occurs, this action isn’t quite as revenue neutral as it seems, if you differentiate between public & private sector. In the public sector it’s a straight wage cut. The s/s reduction goes to the same place as the revenue collection. Providing Lisbon can keep down future p/s wage rises, it’s achieved a reduction in p/s spending without seeming to single out the sector for the economies. Maybe shrewder than it looks.

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