Recovering institutions is the first step for the next government to improve the economy

Reversing the deterioration of Brazil’s political and economic institutions, promoted by the Executive and Legislative Powers in recent years, is seen as one of the main challenges for the next president of the Republic for the country to grow again in a sustainable way.

THE Sheet asked analysts about the three priorities in the economic area for the next presidential term. The answers show that it is necessary to go beyond reforms that increase the efficiency of public spending and the competitiveness of the private sector, an agenda that stood out in the last election.

The attacks on democracy and the constant changes made to the Constitution at the touch of a button shake the confidence of economic agents, say the interviewees, in addition to driving away investments.

In addition to the individual opinion of economists, this perception is currently reflected in the increase in country risk, in long-term interest rates and in the exchange rate.

There are doubts, however, about the possibility of the country electing a president and a Congress capable of advancing in the reconstruction of the country’s institutional framework, at a time when the president of the Republic, ranked second in the electoral polls, says that he may disrespect the poll results.

“What would need to be fixed immediately by whoever will be in charge of the country from January onwards is our institutional framework”, says José Júlio Senna, head of the monetary studies center at FGV Ibre and former director of the Central Bank.

“This involves issues related to our political system, our democracy, fiscal issues and the behavior of government officials. I am not referring only to the Executive, but also to the Legislative. Economic activities fundamentally depend on trust in the future.”

Senna highlights the frequent changes to the Constitution to increase spending in the election year and also the attacks on the democratic system, factors that bring legal uncertainty and distrust to the private sector.

André Biancarelli, director of Unicamp’s Institute of Economics, says that the return to institutional normality is the initial step, a challenge that goes beyond the economy, without which Brazil will not advance in the specifically economic issues.

“The country needs a concentrated effort of institutional and civilizing reconstruction”, affirms Biancarelli. “Brazil has not lived, for a long time, normal times from the point of view of how society, legal relations, politics and economic relations are organized.”

Biancarelli also places among his priorities the reconstruction of fiscal rules, another point highlighted by several analysts, although there is no consensus on which would be the most appropriate for the current moment of budgetary restrictions. He, for example, defends the replacement of the spending ceiling and the end of mechanisms such as the secret budget.

Silvio Campos Neto, economist and partner at Tendências Consultoria, sees the reconstruction of the fiscal pillars as a priority, alongside administrative and tax reforms.

For him, the country needs to convey a message of austerity, discipline, with strict and credible rules, to return to a situation of lower interest rates, as happened shortly after the approval of the spending ceiling in the Michel Temer government (2016-2018).

Campos Neto says he sees a low probability that this scenario will materialize, considering the candidates who lead the electoral polls.

“It is possible, but it depends on a government that believes in this agenda and has the political capacity to implement it”, he says. “It is an optimistic scenario to believe that these three agendas are really touched, whatever the government, among the most considered hypotheses.”

Although they recognize the difficulty in implementing such measures, analysts see the reform of fiscal rules as inevitable — the issue has even been mentioned in a document by Lula’s candidacy.

The tax reform, which advanced in Congress based on the proposals presented by the government and parliamentarians since 2019, is also seen as more mature, while the administrative reform is seen as more difficult.

“Tax reform is a demand that has been going on for some time, it is a strong demand on the part of the business community. At a given moment, the government will have to deal with it, but it will also depend on the characteristics of the Legislative that will be elected”, says Otto Nogami, professor of graduate and executive education at Insper.

Margarida Gutierrez, economist and professor at Coppead/UFRJ, says that, without solving the fiscal issue, the new president will not be able to make the country grow, and that the country also needs to advance in the economy’s productivity agenda, with priority on tax reforms and administrative.

She points out that none of the pre-candidates best placed in the polls has a government program that goes in this direction and that there is a risk that, four years from now, the same discussions will be repeated.

“The fiscal issue is inevitable. Without it we will get nowhere. The country will not grow with the fiscal disarray that we have today.”

Priorities for the next presidential term in the economic area

José Júlio Senna, head of the monetary studies center at FGV Ibre (Brazilian Institute of Economics of Fundação Getulio Vargas)

• Recovery of the institutional framework (economic and political)
• Program with reforms to increase productivity
• Review of resource allocation and public policies

André Biancarelli, director of Unicamp’s Institute of Economics

• Institutional and civilizing reconstruction
• Return to growth, with the participation of the State in the economy to articulate economic, social and environmental objectives
• Reform in the fiscal policy framework (spending ceiling)

Silvio Campos Neto, economist and partner at Tendências Consultoria

• Reconstruction of the pillars of the fiscal framework
• administrative reform
• Tax reform

Otto Nogami, professor of graduate and executive education at Insper

• administrative reform
• Tax reform
• New pension reform

Margarida Gutierrez, economist and professor at Coppead/UFRJ

• Dealing with the fiscal imbalance
• Economic productivity agenda (investment in labor/education and infrastructure, privatization and opening up of the economy, administrative and tax reforms)