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October 2, 2020

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BRAZIL: Comedy of errors may have killed reform agenda for this year

BY Mario Marconini

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( 5 mins)
  • A new cash transfer program (Renda Cidada) has produced much head-banging but little clarity.
  • Shuffling of reforms to try and find money to finance the program has raised the stakes but made a common approach more difficult.
  • An Economy Minister at loggerheads with House Speaker and government leaders in Congress does not augur well for the reform agenda.

A series of mistakes, denials and reprisals this week may have buried the otherwise well-intended reformist agenda for 2020. President Jair Bolsonaro’s government finds itself before a dilemma: how to manage to rein in spending following the piling up of a colossal Covid-19-driven debt while attending to the new-found “invisible” population of informal workers that do not qualify for either the Bolsa Familia or social protections enjoyed by their formal counterparts. The need for cash transfers for the most vulnerable in Brazil, such as the currently proposed Renda Cidada (Citizen Income), is consensual amongst economists but for politicians, first and foremost for Bolsonaro, the search for money to pay for them must bring only political dividends, not losses. This is why the government, working with congressional leaders this week, agreed to propose ways to circumvent, not comply with, the official spending ceiling. The net effect was to send all those involved back to the drawing board after a market uproar. Prospects of an agreement, particularly in a timeframe that makes constructive use of the remainder of 2020, have decreased significantly, however.

Spending ceiling vs. brilliant ideas

It all started on 28 September, when the government leader in the House and rapporteur of the budget bill and the constitutional amendment on a federative pact, Marcio Bittar, announced that a new cash transfer program would be paid for by delaying court-ordered payments of debts (aka precatorios) by the government and by taking away funds from the recently approved education fund Fundeb. Both are questionable since fiscal laws require new spending items to be paid for by cutting – not juggling – permanent – not temporary – expenditures. Economy Paulo Guedes gave an interview on 30 September, denying that the ideas were his and arguing against them.

Guedes vs. congressional leaders

Guedes’ interview was therefore not an admission of guilt but the opposite. He just revealed the visible conflict between the economic team and the political leadership of the government, which has apparently been delegated the task of finding solutions to the Renda Cidada quagmire. Guedes was present in the 28 September meeting but may have been overrun by the expediencies of political horse-trading. Bittar would later justify his own announcement by claiming to have Guedes’ support since he had not opposed it when he could. The leader of the government in the House, Ricardo Barros, simply continued to insist on the problematic two-headed solution even after Guedes spoke. At a minimum, the episode reveals a significant lack of coordination or mutual understanding between the economic team and the government’s leaders in Congress. At a maximum, it reveals how politics may indeed have overtaken economic common sense as a driver of policy.

Guedes vs. Maia

Guedes may have spoken too much once again. He said during his interview that there were rumors that House Speaker Rodrigo Maia had entered an agreement with the Left to delay voting on privatizations – to which Maia responded that he was “out of his mind”. The two have had a volatile relationship all along, despite clear commonalities on the approach to the economy. Maia has of late been upset with Guedes’ foot-dragging on the tax reform, by sending piecemeal proposals that do not add much to drafts already available in both chambers. The only explicit push by Guedes for the reform came at the beginning of the week when he insisted on the inclusion of a “digital tax” on financial transactions as a means to pay for the extension of a soon-to-expire payroll tax cut. Maia has consistently and publicly opposed the new tax and saw in Guedes’ insistence a way to sabotage a serious discussion on the tax reform.

Reforms vs. re-election

It has become increasingly difficult to reconcile the need to finance a cash transfer program, which is especially attractive for the president for electoral reasons, with the need to keep the reform agenda alive and moving. The pressure will remain and Renda Cidada will continue to direct the reform agenda – and not the opposite. Guedes seems to have acquiesced to his new status as “just a minister”. The president will continue to talk the talk of reform and appease markets by shuffling the tax reform, the federative pact, the emergency amendment (the “PEC Emergencial”) and the administrative reform – but his main concern will remain providing for a new cash transfer program that he can call his own, and prevent his popularity from tanking after the current Covid-19-related emergency assistance expires at the end of the year. This is the equivalent of saying that the reform agenda may be dead for the remainder of 2020.

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