World Bank to deliver proposal for economic agenda to Lula

The World Bank is preparing a document to be delivered to the PT containing a list of economic measures that it considers fundamental for the country to follow a path of sustainable growth in the coming years.

The institution defends that the economic team of Luiz Inácio Lula da Silva (PT), regardless of the names chosen, implement reforms and other measures to create an environment of discipline in public accounts, increase productivity in the country and transform Brazil into a leader in green policies.

Johannes Zutt, the new director of the World Bank for Brazil, says that the measures are even more necessary given the scenario of global slowdown in 2023 and the country’s need to maintain social policies.

“It is only possible to have a social protection network to protect the poorest if the economy is generating the necessary growth to pay for it in the medium and long term”, says Zutt to Sheet in his first interview in office.

For him, the almost BRL 200 billion being negotiated with Congress to be executed outside the spending ceiling through the PEC (proposed amendment to the Constitution) of the Transition are not a big problem – as long as there is commitment to a credible fiscal rule to be followed in the following years.

The document, in the process of being concluded, will highlight the need for adjustments in public accounts on different fronts. On the list of recommendations, the containment of wages in the public sector, the review of overlapping assistance policies, a redesign of the tax system and obedience to a credible fiscal anchor.

“There are opportunities to make spending more efficient in public administration, in the social security reform of states and municipalities, in the many tax exemptions and in the social protection programs themselves where there is fragmentation and duplication”, says the executive. “To balance income and expenditure, we can’t just keep putting this off,” he says.

The receipt is accompanied by the bank’s finding that Brazil ended 2021 with a level of indebtedness above peers. Emerging middle-income economies have a gross debt that represents around 72% of GDP, according to the institution, while Brazil registers 80% – a percentage that could grow even more with the extra expenses being negotiated by the elected government. Among the international peers analyzed by the World Bank, only India is above that (84%).

The challenge becomes even greater in the long term, as the ongoing demographic changes will make the population increasingly older – which generates more pressure on the social security system and public services.

“The reforms will allow Brazil to position itself in the medium and long term so that these social expenses can continue at adequate levels. Without this, the country will end up with a very unbalanced account and with a disorderly adjustment to be painfully made in the future for everyone,” says Zutt.

In addition to rationalizing spending, the World Bank proposes that the country turn to measures to increase productivity in order to boost the economy. Brazil grew just 0.53% per capita annually between 2010 and 2021, says the bank, while upper-middle-income peers reached 4%. Members of the OECD (Organization for Economic Co-operation and Development), 1.4%.

Unemployment and informality remained high during the period and the income of Brazilian families fell, increasing the dependence of Brazilian families on social transfers. For the bank, the focus of policies continues to be these programs not only as a way to protect the poor, but as a crutch in the midst of an economy in crisis.

To reduce dependence on transfers, the bank recommends modernizing the infrastructure, reducing the Brazil Cost and expanding commercial opening, in addition to increasing innovation and technology absorption.

“Brazil doesn’t invest enough to maintain its infrastructure, which is deteriorating. So you also need to create space to increase spending now. And not everything needs to be public spending. There’s plenty of room for private spending too,” he says, which advocates simplification of the tax system.

In addition, the institution suggests green initiatives, contain deforestation, advance in the transition to an economy with neutral greenhouse gas emissions and increase the role of carbon pricing.

Despite signals from the elected government making the market question the search for measures such as those suggested by the World Bank, mainly in the fiscal area, PT representatives have stated that at least part of this agenda is in the forefront of the mandate.

Fernando Haddad, quoted as Lula’s future finance minister, said at an event promoted by Febraban (Brazilian Federation of Banks) last Friday (25th), for example, that tax reform and the improvement in the quality of spending will be among the priorities in 2023.

Also a member of the government transition team, PT economist Nelson Barbosa has already defended an administrative reform that seeks to reduce entry salaries, in addition to extending the career evolution time of public servants, in order to contain personnel expenses – the second largest in the Union, at BRL 369 billion (in the 2023 budget project).

“The wage premium in the public sector is quite high. And we are talking about a gradual adjustment, because that [uma reforma] will mainly affect people who will enter the public service [não as que já entraram]”, says Zutt.

Despite the indications, the director prefers not to mention reforms that he thinks are more likely to be implemented in the future Lula government. He assesses that it will take the will to get them off the ground and the ability to negotiate them with Congress.

“No government will be able to implement all the necessary reforms. I’ve been director in more than 14 countries, and that doesn’t happen. You need to have political will and go beyond having skilled people within the government, because you also need to convince Congress. And this is not easy,” he says.

In Zutt’s view, the difficulty in reforms is largely faced because there are always winners and losers with changes. Even so, he says that it is necessary to insist on the theme.

“A disorderly macroeconomic situation will undermine business confidence, which will reduce economic activity and result in lower revenues for the government while there is increased pressure for spending. So you end up in a spiral,” he says.

What the World Bank recommends

Financing sustainable development

• Have a credible fiscal anchor
• Rationalize social transfers
• Make taxation more progressive (i.e. tax the rich more and the poor less)
• Contain public sector wages
• Advance in pension reforms for civil servants of states and municipalities

Creating opportunities through productivity-led growth

• Deepen integration and commercial competition
• Increase innovation and technology absorption
• Increase competitiveness by reducing the Brazil Cost
• Modernize the infrastructure

Economic inclusion of the poorest

• Recover learning losses
• Reduce dropout rates
• Improve teacher quality
• Increase opportunities in higher education
• Support entry into the job market
• Promoting rural economic inclusion

Exploring Brazil’s potential as a green economy

• Prevent land grabbing and strengthen land and forestry governance
• Promote sustainable forest livelihoods
• Scale up climate-smart agriculture
• Decarbonize the energy sector
• Making cities greener in their transport systems
• Taxing carbon and developing carbon markets