Next president will face greater risk since the Real Plan

The next president of the Republic will face the most complex economic challenge since the Plano Real: reforming the state so that it fits in the budget, aborting the ongoing deterioration — with low growth, high dollar, inflation and public debt.

According to sheet he learned, there is a consensus in the teams of likely presidential candidates that fiscal consolidation will be the priority in 2023. Without it, the country would continue in a permanent crisis or more serious than the current one, quickly undermining the political capital of those elected.

The difference lies in how to achieve it: faster or over an extended period, with rules for Brazil to return to generating primary surpluses to stabilize or reduce public debt.

In practice, it would be necessary to save, between what the government collects and spends (not counting interest), around R$ 300 billion (4% of GDP) for a few years. As a comparison, the official estimate for this year is a R$96 billion deficit.

In no other period since the Plano Real (1994) has Brazil grown for several years in a row and generated jobs as in the years when it kept its accounts in order and produced primary surpluses.

With few exceptions, the best years for the economy were between 1998 and 2013, a period in which Brazil faced international and domestic crises without long-term impacts. At its peak, in 2010, the country grew by 7.5%, with inflation under control.

Since 2014, however, Brazil has accumulated primary deficits, which has led to an explosion in public indebtedness. The result has been low growth and rising unemployment and extreme poverty.

To try to control spending, Brazil has had the so-called spending cap since 2016, which limits the increase in spending to inflation. But this rule is now being circumvented with the approval of the PEC dos Precatórios, which will allow for “extract” expenditures in excess of R$106 billion.

As with the Real Plan, which tamed hyperinflation, fiscal consolidation will require attacking several fronts. Repeating the experience of the anti-inflation plan, the fate of the fiscal reform could determine the country’s future in the coming years.

But, according to specialists, unlike recent crucial changes — such as the Social Security reform (2019) or the law that instituted the ceiling (2016) — this time it is not just about approving one or another PEC (proposed amendment to the Constitution) . But to build political and social agreements to move interest groups.

Among them, unions linked to civil servants, which resist administrative reform; companies and sectors that absorb more than R$300 billion a year in subsidies; and parliamentarians, who are appropriating more and more resources from the Budget with amendments to their bases.

At the head of Jair Bolsonaro’s economic team (no party), minister Paulo Guedes (Economy), said last week, at a congressional hearing, that the hole in the roof was the consequence of a decision “by the political class”. But that will continue to pursue fiscal consolidation.

Guedes promises to deliver the government’s primary expenditure (not counting interest) at 18.4% as a proportion of GDP in the last year of government — a little below the 19.5% in 2019.

Recently, the minister’s assistants even proposed to the president of the Senate, Rodrigo Pacheco (PSD-MG), that he encompass the political articulation around a major adjustment. But the idea did not prosper in the face of Pacheco’s decision to run as a presidential candidate next year.

Economist Affonso Celso Pastore, coordinator of Sergio Moro’s program (Podemos), also indicated that the construction of a new fiscal framework will be a priority. According to him, Moro’s program should be based around that objective.

In the PT, which should have Lula as a candidate, there is recognition that the party’s best years in the presidency were those in which the country generated primary surpluses.

According to economist Nelson Barbosa, linked to the party (but who says he does not speak on behalf of the PT), the need for fiscal consolidation “will impose itself”.

“Whoever wins next year will have to reduce uncertainty. The question is whether fiscal consolidation will be pro-people or pro-market,” says Barbosa, who is a columnist for sheet.

In the first case, he says, there could be an increase in spending in 2023 to reinforce social programs, but that would be covered by savings in other areas or an increase in revenue from changes in taxation.

Advisor to Ciro Gomes (PDT), economist Mauro Benevides defends changing the current spending ceiling, removing public investments from the account, which would vary according to income.

But Benevides defends fiscal consolidation and has already suggested a 15% cut in tax subsidies to companies and the taxation of dividends to increase revenue.

João Doria, chosen on Saturday (27) as a candidate by the PSDB, has also already made statements guaranteeing his commitment to balancing public accounts, something that the government of São Paulo is pursuing.

Economist Samuel Pessôa, from the Brazilian Institute of Economics at FGV, is one of those who even advocate an increase in the tax burden on the path to fiscal consolidation.

“After the election, it will become clearer how much society will want to spend. The ceiling can be changed, but it will be necessary to approve reforms that guarantee the sustainability of public accounts”, says Pessôa, also a columnist for the sheet.

“There seems to be a consensus. The discussion is about the composition of the adjustment, with a higher tax burden or from a reduction in the State.”

For the economist and former president of the Central Bank, Arminio Fraga, “in the electoral campaign, the candidates will do the usual [promessas que demandam gastos]. But, in private, they will ‘kiss the cross’ [da austeridade fiscal]”, believe.

“What is not clear is how to do it. And we cannot delude ourselves that this is done overnight; or that three points [percentuais] the surplus solve. It will be necessary to review priorities in a state that spends 79% on payroll and Social Security”, says Fraga, who also writes a column in the newspaper.

Sérgio Vale, chief economist at MB Associados, says that, given the current party fragmentation, the next president will have enormous political difficulties in reaching consensus on a new fiscal framework.

“In 2002, when we had a crisis of confidence and Lula won, he maintained austerity and surpluses on a supra-party basis, with PT, PSDB, [e os então] PMDB and PFL. There was also external pressure from the IMF [o Brasil era devedor no Fundo] and a reformist international climate. That’s not there now,” he says.

Vale believes, however, that the size of the public debt and eight consecutive years of primary deficits (since 2014) will lead to “some accommodation” in 2023. short term,” he says.

Alessandra Ribeiro, economist at Tendências Consultoria, also does not bet on ambitious reforms that lead to deeper and more permanent fiscal consolidation.

“In general, the political class does not seem prepared for this type of discussion, of reviewing the bases of spending, such as social or health and education. The norm has always been to change the rules in order to be able to spend more,” he says.

Tendências has already abandoned the estimate that Brazil would no longer have primary deficits as of 2025 — mainly because of the expectation of lower economic growth in 2022 and the hole in the spending ceiling with the PEC of Precatório.

For economist Zeina Latif, a positive point is that it has become clear that “society no longer tolerates high inflation”.

Although it has causes linked to the pandemic and occurs in several countries, the Brazilian inflationary surge is directly related to the soaring of the dollar, which has already risen almost 45% since the beginning of the Bolsonaro government — putting pressure on commodities such as food and oil.

The constant political instability caused by the president and doubts about the sustainability of public accounts have led investors to protect themselves in the dollar. Now, with the ongoing hike in interest rates, the public debt will rise faster, which could deteriorate an already very unfavorable scenario.

“It seems pretty clear that Brazil will have to regain fiscal discipline. Despite the speeches [que possam ter na campanha], candidates know that this is the fundamental element,” says Latif.

The economist recalls, however, that the application of the ceiling did not prevent “the recent fiscal mismanagement”. And even if complex and comprehensive measures are taken, Brazil will find it harder than in the past to sustain higher growth.

“In comparison with other crises [como em 2002 e 2015-2016], Brazil no longer has the same demographic bonus [percentual de jovens entrando na força de trabalho], quality indicators in secondary education are stagnant and the structural unemployment rate will rise. All of this reduces the country’s potential growth”, says Latif.