Responsible for creating the spending ceiling when he was finance minister for five years in the Michel Temer (MDB) government, Henrique Meirelles counters the recurring criticisms of the measure saying that it generated enormous benefits for the country.
For Meirelles, adjustments to the rule are not necessary. The spending ceiling limits expenditure growth to inflation.
“I don’t advocate any changes. A limit is set and that’s the end of it”, he said in an interview with leaf by telephone, after being officially announced economic advisor to the pre-candidate for president João Doria (PSDB).
Current Secretary of Finance for the state of São Paulo, Meirelles said that the recovery experienced by the country after the 2015 and 2016 crisis was a direct consequence of the cap implemented by him and that the cap did not slow down activity, but accelerated it.
“Without it, we would be in the same regime of unsustainable expansion [de gastos]”, he says.
The former president of the Central Bank in the Luiz Inácio Lula da Silva (PT) government and former financial sector executive says that the vision of public spending to increase activity is outdated, but that it would be possible to make public investments with reforms.
This is the fourth and final in a series of interviews on the five-year spending cap with the current economic advisors of the main candidates for the Palácio do Planalto in 2022. The order of publication followed performance in the latest Datafolha survey.
Did the spending cap bring more benefits or harm to the country? I think it has brought enormous benefits and harm to particular interests, groups or regions.
Brazil experienced a recession between 2015 and 2016 that was the biggest in the country’s history. And the reason was fiscal expansion, an unsustainable increase in spending. The spending ceiling put a cap on that. And Brazil started to recover immediately.
Between June 2015 and May 2016, Brazil had a 5.3% recession, and from January to December 2017, it grew by 2.2%. So we have a change of more than seven [pontos percentuais]. All this was a direct consequence of the ceiling. And it has prevented the return of a fiscal runaway.
Even now, with some expenses being put out of the ceiling, which I think is negative, the ceiling prevents a greater lack of control. Without it, we would be in the same regime of unsustainable expansion. So I think it’s extremely positive.
Among critics, it is said that the roof was built with no walls to support it. like mr. answer this? I think this is merely rhetorical criticism. The ceiling is simply a limit. You can call it something else, a wall, a wall, whatever you want. Now, in reality, the ceiling simply sets a limit on the expansion of expenditures.
The problem is not collecting and taxing society more. The problem is to limit public spending to prioritize spending. If there is no ceiling, no limit, you establish that everyone has priorities. The roof fulfills its function by limiting uncontrolled expansion.
Critics say the drop in interest rates, one of the main arguments for the ceiling, stemmed from the drop in economic activity. How to respond to this type of comment? This comment goes against the facts, it goes against reality. Brazil experienced a recession in 2015 and 2016 and grew in the following years.
The ceiling did not generate a decrease in activity, it generated an increase. Because it generated increased confidence and private investment.
The view that public spending increases activity is outdated. This happens up to certain limits of public indebtedness. Mainly in emerging countries, the increase in public expenditure after a certain point brings an increased risk of public sector default and, therefore, a drop in private investments.
Mr. sees the need for some change in the rule of roof? I do not advocate any changes. Trying to go around the ceiling is creating ways to violate the limit. A limit is set and full stop.
But do you need to spend on investments? Perfectly. A well-done administrative reform, as we did in São Paulo, creates space on the roof for investments in infrastructure and social spending. With the administrative reform, we have R$ 50 billion in cash.
No adjustment? For example, withdraw investments from the ceiling? No. To make room for investments, you have to carry out an administrative reform. I think opening space for investments [via mudança no teto] would avoid a cost cut.
And, even in this moment of recovery of activity, Mr. maintain this position? In the United States, for example, massive public investment in infrastructure is being prepared. There is a big difference between a reserve-issuing country such as the United States [e um emergente como o Brasil]. And in a few years we will see the result of this American policy. It’s too early to judge whether it’s going to be a success.
The last time there was a big expansion in this direction, it generated the crisis of 2007 and 2008. An asset price bubble burst. So let’s wait for what happens in the US. But in Brazil we already have this experience. It spawned a recession.
An emerging country like Brazil is not in a position to issue infinite debt. We’ve already reached that limit. And as you breach the ceiling, you have a drop in activity. Because investors are leaving because of fiscal uncertainty. So the effect is the opposite.
Mr. mentioned administrative reform. Mr. Do you think it can generate immediate effects or would it be more gradual? Depends on how you do it. In the state of São Paulo, we carried out an administrative reform and we already have R$50 billion in cash to invest by the end of 2022.
If you carry out an administrative reform like here, where we closed five state-owned companies with cost cuts, this will already have an effect in the following year.
Some say that even with cost cuts, there would not be enough space under the roof for the country’s needs… I do not agree. If only in São Paulo we carried out a reform that generated R$ 50 billion, at the federal level it would generate a much larger space.
Would this be the first to be attacked? This is the tax reform to simplify taxation and increase the country’s productivity. Mainly the project that was presented by the states. Which is based on the PEC [proposta de emenda à Constituição] 110 or PEC 45, provided that the substitute presented unanimously by all states is approved.
The ceiling applies a restraint on the expenditure side, while relieving the country from re-discussing revenues. Wouldn’t a rule that also consider the revenue side be more suitable? No. The main problem for the Brazilian public sector is expenses. Brazil already taxes a lot.
Brazilian tax collection in relation to GDP is already very high among emerging countries. It is equivalent to a northern European country. You don’t have to increase it. The path is not there.
What we need is to simplify the recipes. And for that, we need to carry out tax reform.
like mr. Do you think that the next government will be different and that the reforms really get off the ground? It is enough to have a government that has the disposition, the leadership and the decision to carry out the reform as we did in São Paulo. It is the example of the largest economy in the country.
And how to generate economic growth and jobs in the country? Exactly doing all this. Firstly, we have to reform the State, generate space on the roof and also carry out tax reform to generate increased productivity and open concessions to make private investments in infrastructure and also to privatize.
Henrique Meirelles, 76
Secretary of Finance of the state of São Paulo and economic advisor to the pre-candidate for president João Doria (PSDB). Former Minister of Finance (in the Temer government) and ex-president of the Central Bank (in the Lula government). Graduated in civil engineering from USP (University of São Paulo), master in administration from UFRJ (Federal University of Rio de Janeiro), with specialization at Harvard University (USA). He worked for decades in the private sector and reached the international presidency of BankBoston, in the United States. He was chairman of the board of J&F (owner of JBS) and headed Banco Original, of the same group
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