Opinion – Samuel Pessôa: Why is the exchange rate moving?

At the end of June, our currency was exchanged at R$4.9 per dollar. Today this fee is R$5.6. Since then, there has been an increase of R$0.7 per dollar.

A simple model that compares the evolution of the real with other currencies of emerging countries suggests that R$0.3 of the movement is due to a global movement to strengthen the American currency against the others, and R$0.4 to our internal issues.

The devaluation movement for domestic reasons coincides with the budget discussion period. Budget discussion is not technical. There are technical issues related to the budget. But the heart of the matter is who pays the state’s bills and who benefits from public spending, transfers and subsidies. The issue is politics.

As pointed out by my colleague and former Finance Minister Nelson Barbosa, who occupies this space on Fridays, it is possible to break the roof and simultaneously not generate confusion in the market. In Nelson’s words: “Second, permanently change the spending ceiling rule, creating a new fiscal limit for primary spending, allowing for real growth in essential spending on investment, health, and education, even if it is with debt issuance in the short term (two years), to be financed with more progressive taxation in the medium term (four to eight years)”.

My disagreement — and I don’t think it’s even a disagreement (it doesn’t all fit in one column) — is that funding more “real spending growth” over the next two years can be through tax increases, as Nelson suggests, but also by means of reducing subsidies and public spending. In general, fiscal adjustments are made through a combination of all three.

If I understood correctly, Nelson attributes to Faria Lima the responsibility for a solution like this not to be adopted. It seems to me that Nelson is wrong in this attribution of responsibility.

In Dilma’s second term, Nelson, both as Planning and Finance Minister, made an effort to adjust the lines of what he currently defends.

In other words, the Brazilian fiscal crisis has nothing to do with Faria Lima. Far from it. Faria Lima’s only concern is that the public debt be paid without recourse to the inflation tax.

Our fiscal crisis is based on society itself and its expression in the National Congress. Congress has chosen a set of state obligations that do not speak to the revenue from taxes, fees and contributions, which the legislature itself has established. We have been experiencing this crisis since 2014. Whenever Congress debates the budget law, the crisis becomes more acute.

And the solution found by the Temer government to create a spending ceiling is due to society’s refusal to hand over more resources to the State in the form of taxes.

The first act of this refusal was the rejection by Congress of MP 232 that the Lula government sent in 2004, which raised taxes on service providers. The last act was the monumental dehydration that the tax reform bill (PL) suffered.

PL raised the tax burden, probably by just over 1% of GDP. It taxed the distribution of dividends from companies operating under the Simples and Presumed Profit regime, in addition to raising taxation on the profits of companies operating under real profit. It also taxed real estate funds and funds abroad, in addition to closing the door to tax planning.

Paulo Guedes sent this proposal to Congress, which dehydrated it in such a way that the current project, if approved, will lead to a drop in revenue. The fiscal problem will become even more dramatic.

The only certainty I have is that we have an appointment with the fiscal adjustment or with inflation. And this doubt moves the exchange rate.