Opinion – Nelson Barbosa: The beginning of the Temer government

Over the past three weeks, I analyzed the causes of the 2014-16 recession. Today I will address the interrupted recovery of 2016.

Remembering: the Brazilian economy stopped falling in the second quarter of 2016, still under Dilma’s government, due to the stabilization of the international scenario and the fiscal flexibility measures adopted from the end of 2015.

PT critics say that the end of the recession in the second quarter of 2016 stemmed from the expectation of impeachment, as this generated exchange rate appreciation, a drop in the interest rate and an increase in GDP. In fact, there was the frenzy “just take Dilma out and the economy will improve”, but this view was quickly belied by reality.

As the economy slumped again in the second half of 2016, it’s hard to say that impeachment stopped the recession. The facts show the opposite because changing government paralyzes the public machine, especially in the midst of a political crisis.

It takes time for the new authorities to name their team and implement what they feel is necessary. In the 2016 scenario, this was even more serious due to the political and technical fragility of the Temer team.

A few weeks after the parliamentary coup, Temer lost his Planning Minister in the episode of the connection “with the Supreme, with everything”. After the departure of Romero Jucá, the new economic team was dominated by the fiscalism of a parliamentary advisor with no government experience, and this compromised the recovery of income and employment.

There was even fiscal flexibility, with an increase in the 2016 primary deficit in relation to the one proposed by Dilma, but this only happened at the end of the year, delaying the stabilization of GDP.

And, in order to differentiate itself from the spending ceiling proposed by Dilma, which admitted real growth in expenditure, protected investment and had a term of four years, the “dreadteam” Temer produced an aberration: freezing most of the Union’s primary expenditure, for 20 years, at the real value of 2016.

Due to the correct expansion of spending at the end of 2016, the initial value of the Temer ceiling was relaxed. The spending cap would only become stricter from 2019 onwards, that is, Temer opportunistically created a ceiling for his successors.

In 2016, I and several analysts warned that there was little point in creating an expense limit without instruments to comply with this rule. The most likely scenario would be the gradual compression of discretionary spending by mandatory spending, which, in turn, would force the government to change the spending ceiling, perpetuating fiscal uncertainty.

On the other hand, the creators of the Temer ceiling said that by “explicitly making the budget conflict explicit”, the spending cap would force Congress to make structural fiscal reforms. Events since then have shown who was right.

Temer’s spending ceiling postponed the pension reform from 2016 to 2019, and generated a series of “drift” constitutional amendments, interdicting the debate on more relevant issues, such as tax reform.

Going back to 2016, on the monetary side, after another change of command, the BC (Central Bank) delayed the easing of monetary policy. Despite the fall in inflation, which began at the beginning of that year, still under Dilma’s government, Ilan Goldfajn only reduced the Selic rate from October onwards, albeit slowly. Real interest rates remained high until the end of 2016, delaying the recovery of the economy.

Theoretically, the initial mistakes of the Temer team could be corrected from 2017 onwards, but that’s not what happened. The economy floundered in the 2017-19 triennium, before Covid hit us. Theme for the next column.