Guedes loses clash with interest groups throughout his term

Minister Paulo Guedes (Economy) took office defending cuts in federal resources and tax benefits granted to interest groups, but enters the final stretch of the term with the task frustrated after the reaction of business organizations affected by the measures.

The sense of disappointment over the goal is shared by government officials who express regret that the “system” is once again firm after the 2018 election campaign was heavily marred by anti-establishment rhetoric.

The biggest example is the promise of a “stab” in the S System, which resulted in transfers of resources not only untouched but also in increasing amounts in the final stretch of the mandate. In the first half of 2022, BRL 12.4 billion were transferred to the entities – if this pace continues, the number will be the highest in at least eight years (inflation already discounted).

“How can you cut this, cut that and not cut the S System? You have to put the knife in the S System too”, said Guedes in a December 2018 speech, at a lunch with businessmen from Rio de Janeiro.

System S coffers are mainly supplied by employing companies. The rates are charged on the payroll and vary from 1% to 2.5%, depending on the sector (industries, for example, pay 1% to Senai on the payroll).

Representatives of these institutions, many of them with strong political connections, managed to reverse the pressure on the Planalto and Congress even after government measures that would reduce transfers.

Another frustration is in cutting tax benefits. The view is that even the attempts at changes fall soon after, through articulations of interest groups in Congress.

The government revoked the Reiq (subsidy program for the chemical sector), for example, at the end of 2021 through an MP (Provisional Measure). The changes were reversed by Congress with the support of the allied base in June 2022 — with Bolsonaro’s sanction.

Another issue that did not go ahead is the administrative reform, which would reduce the payroll of civil servants and put an end to stability. Instead, the government ended up making promises of increases for some categories of civil servants without isonomy in relation to the others..

In the midst of the debate, Guedes even called servants parasites and began to face pressure from the civil service in Congress — which quickly buried the minister’s plan.

Bankers, economists and businessmen heard by the Sheet assess that, without articulation in Congress and support from Bolsonaro, Guedes did not have the strength to take his liberal plan fully forward, and he should not have it in a possible second term either.

“This is a problem of a ministry that has forgotten the political technique”, says the chief economist at Necton, André Perfeito. “It’s not about collusion, it’s about the ability to articulate in Congress,” he said.

Guedes also saw the opening of trade that he would have done through the reduction of import tariffs, announced in 2019 as a way out for the modernization and efficiency of national industry, to a large extent blocked.

At the time, there was talk of 50% cuts in import duties — a move that generated a strong reaction from the industry. Decreases were made, but the main cuts were two rounds of 10% on the TEC (Common External Tariff).

In the opinion of a banker who spoke on condition of anonymity, the minister ended up giving in to the populism of the boss and abandoning items on his agenda with the aim of staying in office while bets on his departure grew.

The combative style also weighed on the decisions, which irritated parliamentarians. Guedes treated Congress as the center of the dirty political game — the give-and-take — attacked by the boss during the presidential campaign.

“If we were talking about a person who has been in office for two months [Guedes]we could say it’s naive, but a lot has happened over time”, says economist André Luiz Marques, professor at Insper.

“Of course, there are sectors that put pressure on us, but that is what politics is for, to articulate, to negotiate, something that this government did not have, nor did it want to have.”

During the pension reform, Guedes publicly attacked Rodrigo Maia, president of the Chamber in the first year of Bolsonaro’s term. The proposal was approved largely thanks to the efforts of the parliamentarian, although not in the complete way the minister wanted.

For LCA economist and researcher at FGV/Ibre (Brazilian Institute of Economics of Fundação Getulio Vargas) Bráulio Borges, a good part of the setback in the economy is due to the fact that the government has tried to “reinvent the wheel”.

“They arrived with a very ambitious agenda. In tax reform, for example, there was already a consensus [em torno do IVA]. Everyone supported it, with the exception of Bolsonaro and Guedes. In 2021 they came up with a proposal that did not solve anything and was still transfigured by Congress,” said Borges.

“When it started, it took the government two years to understand that it has to build a political coalition in Congress to push its agenda. It’s no use simply arriving with the proposal, delivering it and saying: ‘now it’s up to you’.”

This willingness by the government to gain support only came in 2021 at the risk of impeachment. “That’s when the government decided to sponsor the election of Lira and Pacheco, to shield them. They started to no longer deny coalition presidentialism,” said Borges.

For Borges, however, the country had already lost the chance to pass more important reforms, such as indirect taxation — which, for him, would help improve the efficiency of companies and the business environment by reducing the burden of taxes on poorer.

When consulted, the minister declined to comment.