Corporation tax as an investment stimulus

The Portuguese Government is putting forward a reduction in the corporate tax rate as an urgent and necessary economic stimulus. Once again they are way off the mark.

What they are looking for is international investment, so Portugal needs to be competitive on a fiscal level, even if not when it comes to productivity. Once again, this is a public relations exercise. One big investor may bring 1,000 jobs, only to close and move on to the next cheapest country that appears, but brings a huge amount of short-term benefit to the Government.

The biggest taxpayers in Portugal are the fat cats, quoted companies, some with serious managers, mostly backed by ex-politicians and their cronies. Bringing the corporation tax rate down will principally benefit these companies, their shareholders and management.

However, the politicians are forgetting (again) the small and medium-sized companies that employ the vast majority of workers. The tax and burocratic burden on those companies is huge, with Social Security, monthly, quarterly and annual reporting requirements that continue to multiply. These companies actually pay very little corporation tax due to the difficulties of even breaking even in the current economic climate, so there is no benefit to them from reducing the tax rate.

In fact the small and medium companies pay tax regardless of their profitability. Firstly there is the legalised robbery of the Special Payment on Account that must be paid regardless of profitability and cannot be set off against the company's tax charge except if the company makes significant profits. So why call it "payment on account"? Secondly, the companies must pay tax on their motor expenses and other disguised staff costs, a charge that is doubled if the company is loss-making. This reflects the tax authorities total incapability to make sure that these benefits are taxed in the hands of the employee, which is foreseen under the tax law but never happens.

So how to stimulate the economy using corporate taxation measures? Reduce the punitive taxation on small and medium companies. Inspect companies that have the highest disguised staff costs and oblige them to declare the benefits properly, thus raising income from personal taxation. This will benefit companies across the board while only affecting the tax paid by higher earners (another politically correct move).

I'm available to join the inspection team!

Toxic Swaps

I hope the fallout from the toxic swap scandal will be wide-ranging and highly personal.

Managers of public sector companies, with little knowledge of management in most cases, do the rounds depending on the political flavour of the month. Thus the public transport companies are starved of any real managers, in what is already a difficult business where they are expected to balance spending public funds with providing an adequate service.

The one thing these Directors can count on is that they must make strategic contacts so as to stay on the merry-go-round.

Enter the banks. Any manager needs them. Unfortunately they are often not to be trusted, especially when they are getting squeezed from all sides because of the consequences of lending to politically correct companies that, everybody knows and always knew, have little chance of repaying the loans but have the implicit State "guarantee". And in another department somewhere, an analyst has made a bet on commodities which needs to be hedged. What better than to sell it on to unsuspection State companies?

That's not to mention the political appointees leading many of the banks. I have had the opportunity to meet many of them and I will only say that the political appointees obviously had no clue of what was going on, while those who have been there for many years and often have a personal or family stake in the business are much more on the ball.

One of the idiots was on TV today. Engº Faria de Oliveira stated that selling swaps to companies based on commodity prices or indexes that have nothing to to with their business is "a perfectly normal part of banking". Strangely, the banks are prohibited from selling such products to individuals, under european banking regulations, but companies are considered professional investors, even when their Directors are really only professional ass-kissers. That said, I have taken Caixa Geral de Depósitos to task for trying to sell complex products to my father-in-law - not that it was the branch manager's fault. He didn't have access to the documentation I pulled off the internet, in English, and handed him. Who was running the CGD at the time? You guessed it - Faria de Oliveira. But naturally, he had no knowledge of this mis-selling. A bank that big is run at a lower level. Doesn't get him off the hook though, as the Chairman and CEO, if it happened on his watch.

Another bank, one of the better run ones, once tried to sell me, as an FD, credit default swaps on various Portuguese companies, arguing that they would provide insurance against increases in interest rates. But surely, in interest rates rise, the chance of defualt also increases! They backed off once I pointed that out! Once again, the account manager didn't understand the product. Fortunately I have studied these beasts.

So the banks were pushing these products out to companies where the FD has no idea what they are because he is a political appointee with no experience of anything and needs to keep the banks happy. And he and his fellow Directors sign away the company's future. Who is to blame?

The bank is guilty of misrepresentation and will have to take a haircut.

As for the Directors, they are jointly and severally liable for negligent and ruinous mismanagement. So let them pick up the rest of the losses, personally. Maybe that would signal to the rest of the political community that incompetence cannot be tolerated, nor people who are incapable of admitting that they don't know what they are doing. Get rid of these guys and make room for people who do understand business and how to run a company. On the other hand, as the shareholder who would have to sue these individuals is the State, I can't see that hapenning.

So the taxpayer will pick up the bill, again...

Unconstitutional Government

In Portugal, the successive governments are numbered since the date of the foundation of the third republic in 1976. The current government is "Constitutional Government XIX".

Last Friday the Constitutional Court overturned a number of clauses in the 2013 budget on the ground that they infringe the constitution. Fortunately the Government and the President (both PSD) have concluded that they must battle on and not call elections, which would have caused irreparable damage to the country and its support from the international financial backers.

What I find strange is the Government's reaction to the Court's decision. They accuse it of not taking the financial crisis into account when reaching their decision! Surely that is the whole point of having a Constitutional Court: to uphold the constitution whatever the circumstances? Even the judges appointed by the current Government voted against the clauses that were overturned.

So with a record of two partial failures to comply with the constitution in two consecutive budgets, I propose that this should be renamed "Unconstitutional Government XIX".

Now stop playing the offended spouse and get on with governing!

No Confidence in Portuguese Politicians

Yesterday the opposition Socialist party's motion of no confidence in the right wing PSD/CDS government was predictably voted down by the majority coalition but not before causing a run on the stock market.

The only thing this fiasco proved was that, once again, the politicians are idiots who are more interested in posturing and pandering to the mass media than in trying to run the country. And the biggest idiot on the stage at the moment is José António Seguro (whose surname ironically translates as safe or insurance), the leader of the opposition. He is a caretaker leader for a period when the Socialist party had no hope of even influencing policy but now puts himself forward as candidate for Prime Minister! That's more frightening to me than the terms of the Troika loan.

He was steamrolled into the vote of no confidence by the media, while realising that he has to play to the creditors who are withholding stage payments on the international funding in view of the political turmoil and disastrous financial performance. And I won't even start on assessing their performance because I am not an expert in macroeconomics, though it seems to me obvious that their cuts could have been expected to cause the sharp recession and severe reduction in tax receipts that has been seen in the first two months of the year.

So here we are, suffering from the excesses of the past, stuck with a bunch of idiots as leaders whose long-term plan is to get away with a nice job or pension at the end of their second term but with nobody better to replace them that I can see. That's politics I suppose...

But one deficit reduction proposal could come out of this: Those parties or members of parliament who are found to be wasting time rather than producing something constructive should have their pay docked! Or would the process of proposing and voting that through also be considered a waste of time?

A Step Backwards to Move Ahead?

The Portuguese media abounds with pundits and analysts on all things Catholic and none of them were betting on the Argentine cardinal for the top spot. So its better not to chew over in detail all their arguments and commentaries - I am after all an unbeliever.

But the idea that they have now appointed the man who should have been chosen 6 years ago rather than D. Ratzinger is interesting. It's a shame he's now older and inevitably less energetic than he would have been. So will Pope Francis make any difference or is he just another compromise candidate to pander to the establishment? Only time will tell...

General Overkill

No that's not the name of a fictional gaming character. Saturday saw a meeting of high-ranking officers in Lisbon to discuss the future of the armed forces under the economic austerity programme. Nothing unusual about that in these troubled times. Until we discover that 50 generals attended! How can a peripheral country like Portugal justify having 50 generals?

I have doubts about the usefulness of having an army at all and the navy and air force should be reinvented to deal primarily with search and rescue and patrolling the coastline against drug and other smugglers. But that's not the point.

The armed forces are a significant burden on the country's finances and have actually been little affected by the cuts so far. It has always been a job for life (which admittedly has served my adopted family well). And I won't even go into the waste of money and resources that is rife among staff which consider themselves badly paid nor into the inoperative machines and equipment bought by successive governments with no proper consideration of the ongoing operating and maintenance costs.


Of course, those at the meeting may be serving and retired generals as we can't really stop them getting involved after retirement on their comfortable pensions. It later turned out that they were generals and admirals. I hope they resolved to help the belt-tightening exercise, but somehow I think not.