Analysis: Fiscal balance is key for the country to grow again

Brazil has grown little in the last 40 years. In some periods it even rehearses a chicken flight, which soon reverts into recession. Relevant growth is growth that is maintained for many years and substantially raises the population’s income. Otherwise, it is difficult to reduce poverty and inequality, which has contributed to political polarization and division in society. A house where there is no bread, everyone fights and no one is right.

There are two fundamental causes for our inability to grow consistently: chronic fiscal imbalance and low productivity.

In the fiscal field, the growth of public expenditure leads to high interest rates, a heavy and complex tax burden, inflation and a valued currency. This brings down investment and the external competitiveness of our “non-commodity” exports.

low productivity means that our labor and capital produce much less than they could, and it stems from several factors: deficit in the education of workers; low access to new technologies; government protection of both politically strong and small, inefficient companies; complex tax system; juridical insecurity; and infrastructure deficiencies.

Fiscal imbalance and low productivity feed each other. For example, poorly educated workers are not very productive, earn low wages and become dependent on income transfers, putting pressure on public spending. To cover this cost, the tax burden grows, and companies lobby to evade more taxes.

Tax benefits multiply, the tax system becomes more complex, and the companies that are most able to obtain benefits in Brasilia, rather than the most productive and innovative, end up thriving.

Changing this reality has been the work of more than a decade. The Lula government of the next four years will, at best, manage to take some steps in the right direction and, hopefully, avoid wrong choices.

The first difficulty is that PT’s diagnosis of low growth is not this one. The party believes that it is up to the State to subsidize companies to stimulate investment and increase public spending to boost the economy. This type of policy, adopted in the party’s four terms, exacerbated the problems and threw us into a deep recession.

Three days before the election, the PT released a letter that reaffirms this vision, which, incidentally, is consistent with what Lula said about the economy during the campaign: reactivate the PAC; interfere with fuel prices; induce state investments in refineries, tighten labor legislation.

Contrary to the necessary fiscal adjustment, Lula promised to revoke the spending ceiling, readjust the income tax table and give successive real increases to the minimum wage (which weigh on public accounts and push low-skilled workers into the unproductive informal market).

The promise of repeating the primary surpluses he made in the first government is not convincing. A good part of those surpluses were produced by a positive phase of the economic cycle, which increased revenues, and not by any real fiscal effort.

Your first challenge to having a successful government will be to put that agenda aside without it looking like electoral fraud or abandonment of your loyal base. It will have to find an alternative agenda, one that is not incompatible with the party’s aspirations and that effectively helps in fiscal balance and in the improvement of productivity.

The second difficulty is that we have a Congress specialized in defending the interests of organized groups to the detriment of the collective interest: companies, professional categories and the financial and electoral interests of parliamentarians. The fiscal adjustment and productivity increase agenda conflicts with this modus operandi, as it requires horizontal policies that do not create privileged treatments.

It is necessary to choose priorities that manage to navigate the narrow corridor left by the restrictions mentioned above.

A promising possibility would be the reform of consumption, income and payroll taxation. If well executed, they will reduce distortions in the current tax system, increase productivity, make taxation fairer and more progressive, and reduce the cost of formal employment.

These reforms are technically mature, the resistance of some sectors has already been greatly reduced and the issue does not clash with the PT’s banners. In the case of income taxation, there is even a clear demand from its supporters for greater progressivity.

It will not be easy. The greater or lesser quality of each renovation is in the details. It will take a great effort to ensure that Congress does not include benefits for specific groups in the final text. And there will be great wear and tear on the upper middle class, as it will be necessary to deal with reducing discounts for the elderly and for spending on education and health.

Another reform that could have space would be the redesign of social policies. Spending in this sector has increased a lot, already exceeding R$ 300 billion per year. But there was a deterioration in the design of Auxílio Brasil, making it a waste machine, and abandoning the Cadastro Único, which is the compass to guide social programs.

Unifying the programs, in a design that focuses attention on the poorest 40%, and gives adequate treatment to the insecurity and income volatility of workers in the application or informal sector, would be a great gain, fully consistent with the PT’s social agenda, and liable to negotiation with Congress.

These would be kick-offs, which would guarantee a good start to the government and credibility for other reforms that unlock growth and make room for poverty reduction. The schedule is long and challenging. Additional reforms will be needed to limit spending growth, including dismantling the machine of corruption and inefficiency hidden behind parliamentary budget amendments.

Areas left behind by the last government, such as education, health and the environment, will need recovery plans, for which there will not be much money: it will be necessary to work with priorities and the search for efficiency.