Opinion: Letter to President Lula

Our intention, in addition to congratulating elected president Luiz Inácio Lula da Silva (PT) for his victory, is to make a counterpoint to the letter by economists Arminio Fraga, Edmar Bacha and Pedro Malan, published in this newspaper.

The said economists are opposed to his commitment to repeal the spending cap, as it plays a key role in ensuring fiscal responsibility, keeping inflation in check by ensuring “market” confidence in government policies.

The idea that the spending cap is key to ensuring fiscal discipline is a fallacy. In fact, the ceiling proved incapable of preventing the government of Jair Bolsonaro (PL) from spending an extra R$795 billion in four years and creating new public spending less than six months before the elections.

Economists argue that Brazil pays very high interest rates because the state is not perceived as a good debtor. This statement is wrong. The market assessment of the risk involved in lending money to sovereign governments can be measured by the Embi+ (the difference between the interest that an emerging country charges in relation to that charged by the US), calculated by JPMorgan.

On January 2, 2003, the first working day of your first term as President of the Republic, Your Excellency inherited from the previous government a country risk measured by the Embi+ of 1,374 points, that is, a spread of 13.74 percentage points over the interest rate on American public debt securities. On December 31, 2010, the country risk had reduced to 189 points, proof of the confidence of the “market” in the fiscal responsibility of its government.

The spending ceiling was approved in the Senate on December 13, 2016, the date on which the country risk measured by Embi+ was 324 points, 71.42% higher than that recorded on the last day of his second government. On the first working day of the Bolsonaro government, the country risk was at 275 points, a value just 15% lower than that observed on the day the ceiling amendment was approved, but 45.5% higher than that verified on December 31, 2010. The market’s assessment is clear: the spending cap was not able to reduce country risk.

Fraga, Bacha and Malan also claim that the rise in inflation that occurred in 2021 and 2022 was the result of the lack of control of public spending in the Bolsonaro government, which “pierced” the ceiling by BRL 117.2 billion in 2021 and BRL 116.2 billion (expected) for 2022. This is another misconception.

The increase in inflation was not a phenomenon restricted to Brazil, nor is it due to fiscal imbalance, but rather the result of events that generated a huge supply shock worldwide (Covid-19 pandemic and War in Ukraine). Accumulated inflation in 12 months in the European Union in October 2022 stands at 11.3%, almost double the value observed in Brazil.

The aforementioned economists maintain that the problem of lack of resources for the social area and public investment is not due to the ceiling, but to the lack of priority by the government. However, the ceiling is an element that imposes a long-term squeeze on the budget dedicated to these areas, since by freezing primary spending in real terms for a period of 20 years, the vegetative growth in Social Security spending of 3% a year year causes the other Budget items to be compressed.

During the Bolsonaro government, in addition to the reduction in public investment and resources in the areas of health and education, civil servants’ salaries were reduced from an average of 4.4% of GDP in the FHC, Lula, Dilma and Temer governments to less than 3 % of GDP in 2022. This adjustment has reached its limit, and it is no longer sustainable to keep them compressed, making the ceiling unfeasible.

In conclusion, we understand that it is legitimate and feasible to make room in the Budget to facilitate public spending to face the social and economic crisis, which should be combined, when sworn in, with the adoption of a new fiscal rule that combines budgetary flexibility with public debt sustainability.