Meirelles says support for Lula depends on economic proposals being the same as in the past

Former Central Bank president and former finance minister under Michel Temer (MDB), Henrique Meirelles has already contested a presidential election and says that Lula will be the best option if he repeats the economic guidelines of previous terms.

Meirelles, today a global advisor to Binance, the largest cryptocurrency exchange in the world, participated, this Monday (19), in a campaign event by Lula and Fernando Haddad (PT) in São Paulo.

The former minister says that the programs filed with the TSE (Superior Electoral Court) are worrying for the economy and argues that the country needs to respect the spending ceiling combined with administrative and tax reforms.

“The moment you think that doing the right things is unfeasible, then there is no solution for the country.”

The former minister says he lost the election in 2018 for presenting a serious program.

“I presented a proposal praised by analysts, but it was not a popular proposal.”

For him, the reduction of ICMS (Tax on the Circulation of Goods and Services) was an electoral measure.

“It had an effect of falling inflation this year, but with limited effect on the economy,” he said. “The price of a large part of consumer goods, which affects the population, was not affected [pelo ICMS]. The population continues to experience very strong inflation.”

Lula is the leader of the polls and is looking for an economy minister with a dialogue in Congress. If he is elected and you are invited, will you accept? I don’t waste a minute making decisions about hypotheses.

Was it probed? Not.

Which candidate do you support? At the moment, I do not declare a vote. The experience I had in BC [Banco Central] in the Lula government was positive. Despite misrepresentations [de Lula]I hope that reality [das medidas a serem tomadas para a Economia] prevail and, if prevailing, would tend to think that if there are indications that he is going to go in that direction [de seus mandatos passados]I think it’s a good option.

Who has the best proposal for the economy, Lula or Bolsonaro? The proposals range from being generic to negative. From what is in the programs, the situation is worrying because they do not address what the country needs. The next government should basically carry out a well-done administrative and tax reform, to increase the country’s productivity.

First of all, an unequivocal statement would be needed that, contrary to what is being said, there will be respect for the spending ceiling [regra que corrige o gasto de um ano pela inflação do ano anterior].

In order to respect the ceiling, it will be necessary to carry out fundamental reforms, mainly administrative reforms, to reduce the cost of the federal machine and, also, to close state companies that have lost their purpose. From there, you generate resources within the ceiling to enable social programs and minimum investments.

Then they say: ‘this is not politically viable’. When you think that doing the right things is unfeasible, then there is no solution for the country. I just think it’s doable.

Lula and Bolsonaro promise to reactivate the economy through endorsements with public money to back loans, something that is already happening via Pronampe. Is this a good way? Which [os candidatos] what they propose is more of an electoral version, it is that of seeing the government as a magical source of resources. [A proposta] it is ultimately risk-government, a different way of injecting public money. Then, if the bank lends with a government guarantee and, due to some difficulty, the borrower does not pay, it is the Union who pays. The bank does not assume the risk.

The problem is that this costs everyone, because inflation and interest rates rise. If this is done the way it was designed, and I hope it isn’t, I don’t think the results will be very different from what has already been done in Brazil, which is the recession.

The government says that the measures taken in the pandemic have allowed growth to be greater than that of other countries. Do you agree? The economy always expands when there is fiscal expansion in the first place. There was a great expenditure of resources not only in the pandemic, but also when the economy was already in full recovery. We will see growth driven by household consumption in the first place and, as a consequence, the growth of industry.

The question is to define how long this moment lasts, because the problem of fiscal expansion above the country’s collection capacity, of balanced indebtedness, is that, at a given moment, the country risk, interest rate, inflation itself rises. And that has an effect on the economy in the next instant.

The economic team celebrates the alleged flaws in the GDP projections made by the market. Analysts did not count on this above-expected injection of public resources, nor on the explicit agreement expressed by the economic areas of the government openly to have a better electoral result as a result. The whole issue is from 2023 onwards, because it will not be feasible to maintain this expenditure.

It will be very difficult for the next president to cut Auxílio Brasil, for example, mainly because the economy has not yet returned to full employment. It is very far from that, despite a certain improvement.
Whoever is in government and is part of an electoral process has an almost euphoric judgment [dessas medidas]. Outsiders see a fiscal problem generating inflation and eroding purchasing power.

No major reforms were carried out under Bolsonaro, but there were economic measures considered structuring. Did they have any effect? Some effect did, but not enough. There was some change in the IPI [Imposto sobre Produtos Industrializados] and in the IR [Imposto de Renda]. But this is not a sweeping reform.

There is a proposal for a tax reform in Congress, the object of a unanimous agreement, unprecedented for the first time in 30 years between the states, which does not affect the collection and gives productivity to the economy.

The candidates’ proposals do not contemplate this. They contemplate benefits, which, in the electoral process, is understandable. We would need to be living in another political and social moment for a serious electoral program, well done, with what actually needs to be done. But that would not be popular and would not win the elections. I contested an election, presented a proposal praised by analysts, but it was not a popular proposal. Got 1.7% of valid votes.

What is your assessment of the reduction of ICMS on fuels and essential services? It’s that story: I decide to make a serious sacrifice, but the neighbor will do it. The neighbor cuts costs, and I do nothing.

ICMS is the main source of revenue for states, which are responsible for investing this money in health, education and security. Since they cannot issue debt securities, as the Treasury does, when they run out of money, they have to cut expenses, wherever they are.

The ICMS cut was basically that. It had an effect of falling inflation this year, but it did not reach most of the population. It was fuel-specific, with limited effect on the economy. O
price of most consumer goods, which affects the population, was not affected [pelo ICMS]. The population continues to experience very strong inflation.

What can happen if the ceiling is relaxed, as the two candidates point out? Economic indicators anticipate what is happening in the present. The economy is already saying what it thinks [das propostas dos candidatos] and the evaluation is extremely negative.

When I entered the ministry [da Fazenda], the country was in a recession and the government was spending a lot. I ordered a correct assessment of all the expenses that should be in the Budget. This resulted in a primary deficit of R$170 billion in 2016, which showed unsustainability. The country risk kept rising.

The moment you start to say electorally nice things or, worse, come out and do these things [gastos fora do Orçamento], the result is increased risk. There is a drop in confidence, a decrease in investment, an increase in interest rates, inflation rises and unemployment increases.

Today we have high interest rates and accumulated inflation until August is almost 9%. Is it a problem with the current BC board or are the conditions very bad? We have high inflation, the BC raises interest rates, contracting economic activity. How would it work? If, at this time, the candidates announced that they will obey the ceiling and carry out the administrative reform.

The fiscal policy [feita pelo governo, que determina gastos ou redução de despesas] working in the same direction as monetary policy [feita pelo BC, que arbitra parâmetros econômicos, como juros e inflação] makes monetary more effective. If each one goes in one direction, it gets complicated because, on the one hand, the BC tries to hold and, on the other, the executive keeps pushing. This is where we have this negative result situation.

You were part of a PSDB government in São Paulo. How do you assess the political erosion of the party? I don’t think it’s surprising that a party with the strength and importance of the PSDB has lost some of its leading role in this polarization.

Today we don’t have PT versus PL [partido do presidente Bolsonaro]. It’s Lula or Bolsonaro. They are popular leaders, two versions of populism. The party doesn’t matter.

Is this bad for the democratic process? In Brazil, the party system is not as strong as in countries where there is district voting [como nos EUA].

I am not saying that the district vote, especially the pure one, would be viable in Brazil, with a semi-presidential system. But this system leads to the strengthening of parties. [O sistema distrital] it is not viable for the next few years, but there is no doubt that a district voting system leads to the strengthening of parties and this, in the long run, is positive for the country, because it avoids these distortions and reduces the creation of populist leaders.

Binance, the world’s largest cryptocurrency exchange, has been criticized for being a vehicle for financial crimes. Why did you accept to be part of this company’s global board? Binance is the largest cryptocurrency exchange in the world and has created a council to work towards regulation [desse negócio]. The idea is to keep digital currencies efficient, allowing control of the origin of money, as with the real or the dollar.

The real and the dollar were not always like this. To issue currency, a bank had to have gold deposited in its vaults. When unbacked currency began to exist, it got out of control, there was hyperinflation in Germany, for example.

In Brazil, this lack of currency control occurred between the 1980s and the beginning of the following decade. Mechanisms were created to regulate currency expansion. It had inflation targets, exchange rate fluctuation, fiscal results, all of this together is what gave currency stability, including the real.
Binance’s proposal was to do exactly that: create a regulation. I was called for my experience, not only at the BC, but also as a member of the board of directors of the Central Bank of Basel, the BC of BCs, where we discussed the regulation of the international financial system after the 2007 and 2008 crises.

I think it’s an important job because it’s no use closing one’s eyes to the future. There is fake news on the internet and we do not close our eyes to the internet.

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Henrique Meirelles, 77

He holds a degree in civil engineering from USP, an MBA in Business Administration from UFRJ and an Advanced Management Program from the Harvard Business School, as well as a doctorate (honorary title) from Bryant College. He worked at BankBoston for 28 years, where he rose to the global presidency in the US; elected federal deputy for Goiás in 2002; president of the Central Bank of Brazil (2003-2011); president of the Olympic Public Authority (2011-2015); Minister of Finance (2016-2018) and Secretary of Finance and Planning of São Paulo (2019-2022).