At the end of last year, many analysts expected that fiscal populism would end with the approval of the PEC dos Precatórios. The “untouchability” of the spending ceiling was compromised to allow for a tripling of spending on Bolsa Família; But everything in life has a price, and laws that restrict spending in an election year would be a buffer for 2022.
Read mistake. 2022 has barely begun, and we’ve already seen an avalanche of irresponsible proposals. Analysts once again do not give much importance, looking only at the electoral race and the expectation of change. They ignore that the country is increasingly vulnerable and that the initial conditions of the economy in 2023 will determine the size of the necessary adjustment, its speed, its scope and its chance of success.
The PECs to alleviate the rise in fuel prices through tax cuts tend to be just the beginning of the fiscal spree. There are proposals to institute diesel aid, subsidies for public transport and an increase in gas vouchers. Such programs would be exempt from the primary target, the spending ceiling and the golden rule. Still in the line of populist measures, we have the increase in the income tax exemption range, the possibility of reducing the IPI on durable goods and the new Refis.
The market barely reacts to so many antics, enveloped in the euphoria of the increase in foreign flows on the stock exchange and the appreciation of the real. After all, what matters is that we elect a skillful, centrist president who will form a government imbued with social and fiscal responsibility. Through gradual adjustments to some expenses, an increase in the tax burden and a broad base of support in Congress, the elected official will reduce the economic uncertainty generated in the last two years. With confidence restored, interest rates will fall, and Brazil will resume growth.
Another illusion. Current common sense is not only counterproductive, it will be of little use at the beginning of 2023. Counterproductive because it opens space for a seemingly limitless worsening of fiscal accounts. Of little value because all the historical episodes of fiscal consolidation that reestablished price stability and GDP growth were not due to favorable expectations, but rather from a set of actions.
The problem is that the idea that today’s damage can be easily circumvented in the coming years doesn’t hold up. Monetary, fiscal and economic conditions at the beginning of the adjustment process matter.
In general, gradual consolidations are not successful in situations of high and increasing debt levels and in a low growth environment with high interest rates. Fiscal emergencies require quick and significant adjustments. To understand the extent of the adjustment needed over the next few years to stabilize the debt-to-GDP ratio, we will need an increase equivalent to 4% of GDP in the primary balance. This will be very challenging in the context of broad budget rigidities and increasing spending pressures related to rapid population aging and rising inequality.
The composition of the fiscal adjustment also matters for the probability of its success. Adjustments based on spending cuts are much less costly and more successful than those based on tax increases. If the proposed consolidation consists predominantly of taxes with a low collection capacity, such as those on large fortunes, the credibility of the adjustment will quickly erode.
Experience also suggests that fiscal rules increase the likelihood of debt stabilization, given the reluctance of governments to commit to fiscal discipline under adverse conditions. Not only have we already given up on our rules, but we also see no desire to reinstate them in the favored candidates. And even if that is the case, how credible is a new spending ceiling? Once the rule is changed for convenience, it will be difficult to rebuild its credibility.
Whoever is elected will need to show that the confidence shock is here to stay, not being able to give up a significant adjustment, the re-establishment of a credible fiscal rule and budget control. The benefit of the doubt is being given to the next government, but it has an expiration date. Positive expectations always help, but they are no guarantee of a happy ending for a horror movie seen with your eyes closed.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
