It was close, but they didn’t make it. The political fixers of Brazil’s government had hoped to push through a bill on Wednesday that would have removed its obligation to meet a target of a primary fiscal surplus (before debt payments) of 1.9 per cent of GDP in this year’s budget.
The hope was that the bill would have been passed in time for the expected announcement on Thursday of a new economics team, widely tipped to be led by Joaquim Levy as finance minister. Success would, in a way, have swept out the old team’s jiggery pokery over public accounts before ushering in the new brooms of team Levy. Now it will just have to be done after the event.
The move has sparked outrage in many quarters of Brasilia, already in a state of semi-permanent apoplexy over the mounting scandal at Petrobras, the state oil group. Aécio Neves, the opposition PSDB candidate defeated by the incumbent Dilma Rousseff at last month’s presidential election, said the move would throw out Brazil’s fiscal responsibility law, one of the great conquests of the reforming PSDB government of 1995-2002. He has threatened to challenge the new law in the Supreme Court.
The Rousseff administration’s failure to deliver fiscal responsibility is one of its biggest failings in the eyes of many economists and investors. When her party, the leftwing PT, came to power under Luiz Inácio Lula da Silva in 2003, the primary target was set at 4.5 per cent of GDP. It has since dwindled, first to 3 per cent, then to 1.9 per cent. Now the government wants to abandon it altogether.
In some respects that is no bad thing. Very few people outside the government believe its figures. In recent years the target has only been met, critics say, by accounting tricks such as delaying expenditures to the following year, or counting as revenue items that were previously off-budget, or making unorthodox transfers from Brazil’s controversial sovereign wealth fund. A splurge of stimulus spending after the global financial crisis of 2008-09 and the subsequent failure of Brazil’s economy to grow as expected have put years of strain on public finances.
“The government ended up with the worst of both worlds,” says João Augusto Castro de Neves of Eurasia Group. “It tried to use expansionary policy and gave a lot of tax breaks. It gave up a huge amount of revenue in an attempt to get the economy to grow, but it didn’t.”
The change to the law, if it is enacted, will remove a legal obligation on the government to meet its 1.9 per cent target. Many economists expect it to end up with a small deficit this year – before interest payments that are equal to about 6 per cent of GDP. Changing the law would at least remove the fiction that the target was being met.
But does it wipe the slate clean for Levy, assuming he gets the job? In the sense that it is a first step towards transparency, albeit a dubious one, yes. But while it should let Levy get off to a good start, many investors and others will reserve judgement. The word in Brasília is that Rousseff has understood the need for a genuinely independent, orthodox economics team. Whether that is true will be proved over time.
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