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September 3, 2020

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BRAZIL: Greater governability now hinges significantly on Guedes

BY Mario Marconini

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( 3 mins)

Economy Minister Paulo Guedes spoke by videoconference to the Covid-19 Joint Committee in Congress on 1 September. Contrary to expectations, the climate of the meeting was cordial, and no participant referred to the minister’s attack on the Senate for overturning a presidential veto on wage increases for public servants on 19 August. Guedes spoke profusely and put forth a strong defense of the official inflation-limited budget ceiling. He also announced that the government would submit a proposal for an administrative reform to Congress in the coming days – which was confirmed for today, 3 September, by President Jair Bolsonaro. All seemed agreeable and sensible; no insults or bickering, only facts and figures.

This follows another episode on 25 August when the minister was to announce the “big bang” – an economic recovery package that would combine a new cash transfer program for the poor (“Renda Brasil”) with pro-growth measures such as public works, privatizations, and job-creation measures. Guedes had to retract due to the president’s strong opposition to ending certain social programs to finance Renda Brasil. Bolsonaro gave a speech the following day strongly criticizing the minister and his team for daring to propose such “nonsense”. The minister reacted well, saying that it was natural for him to take on the role of bad guy as needed. The challenge was on for him to find the money with which to satisfy Bolsonaro’s electorally-driven intention to extend the popularity that the Covid-19 emergency assistance afforded him all the way to the 2022 election.

The challenge is colossal since unless the government convinces Congress to change the budget ceiling (highly unlikely), it will either have to raise taxes (unacceptable for Speaker Rodrigo Maia and the whole of the private sector) or cut spending through, for example, public servant wage reductions or dismissals. Considering that Bolsonaro has already declared that an administrative reform could only affect new public servants, savings will still need to come from elsewhere. In Brazil, 93.9% of the budget is earmarked on mandatory spending items, which provides too little room for maneuvering, particularly at times of fiscal scarcity. This is why a plausible path is to “resuscitate” the discussion of a constitutional amendment (PEC) for a new Federative Pact – a broad reference to a new arrangement that would at a minimum allow for greater discretionary spending and trigger measures to force compliance with spending caps at federal and sub-federal levels.

The government presented such a PEC last November, but it has never gained any traction since. Matters are unlikely to move in the right direction if Bolsonaro’s push for Renda Brasil and pro-growth initiatives can only be financed by Guedes’ highly controversial re-edition of a failed financial tax – the so-called CPMF. In addition, for both Maia and Senate Chairman Davi Alcolumbre, the government needs to own the push for reshaping public finances at all levels of government and not just champion compliance with the existing budget ceiling. Ideally, the government should not shy away from cuts in public servant wages and other spending reduction initiatives. Neither Congress nor Guedes can do it alone, however. The signpost to watch is whether Bolsonaro will step up to the challenge.

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