Opinion – Marcos Mendes: Public investment and economic growth

The argument that it is necessary to increase public investment to untie the logistical knots has become fashionable, increasing the growth potential of the economy. To do so, it would be necessary to remove investment expenditure from the expenditure ceiling. Will be?

IMF data from 2019 show that Brazil has primary public expenditure of 40% of GDP, well above the average for emerging countries (24%). Therefore, it cannot be said that investment is low because our State is small.

What happens is that our mandatory current expenditure is large. Ineffective programs are not reformulated or terminated. New demands for public action are met by additional spending, and the investment —easier to cut or not start—ends up being expelled from the Budget.

Nor can it be said that the spending ceiling represents excessive austerity, aimed at generating surpluses to pay the public debt. After all, even with the ceiling, the federal government has a primary deficit and, therefore, does not generate such a surplus.

Increasing investment expenditure, without reviewing other expenditures, will imply an increase in the deficit. The risk of lending to the government will increase, leading to more interest rates and uncertainty about macroeconomic stability. Private investment (in infrastructure and other sectors) will decline, undermining growth. Shot in the foot.

There are those who suggest investing more without increasing the deficit, by raising taxes. However, according to 2019 IMF data, we have already collected 35% of GDP in taxes and social contributions, compared to only 22% of the average for emerging markets.

Raising taxes doesn’t just bring the cost of taxes paid. There is also the so-called “dead weight”. To avoid paying more, taxpayers change their behavior: reduction of activities, evasion, informality, change in the organization of production, tax litigation. It was not for nothing that we arrived at such a distorted tax system. Raising taxes is to encourage more distortions and lost productivity. Another shot in the foot.

From the point of view of economic growth theory, there is no reason to imagine that increasing physical capital, via public infrastructure, is more effective than increasing human capital. Our education is precarious. Making more effective use of the 6.3% of GDP we spend on education would increase the potential for growth without more public spending and reconcile growth with reducing poverty and inequality.

Technological evolution has reduced the need for public investment. For example, mobile telephony opened up the possibility of competition and private provision, which was more difficult in the fixed telephony era. Large hydroelectric dams are being partially replaced by solar collectors on the roofs of houses.

Advances in economic regulation and long-term private financing instruments have expanded the possibility of private infrastructure management. In Brazil, however, we face problems of poor regulation and capture by regulators. It would do a lot for the infrastructure to prevent regulatory agencies from being managed by political appointees without technical qualifications. And that deputies should not try to revoke the agencies’ decisions, as they are currently doing with Aneel.

The political capture is not only of regulation, but also of the Budget. Raising the spending ceiling in order to make more investments will, in practice, end up generating more investments via parliamentary amendments, whose low quality is printed daily in the newspapers.

And it is not just in the amendments that we have technical difficulties in making decent public investment. We did poorly in engineering projects, in the bidding processes, in the execution of works. TCU’s audit in 2019 identified 14,400 paralyzed works. Only 10% for lack of resources. In 47% of cases, the problem was one of technical execution. Work stopped or poorly done is physical capital that produces nothing. The PAC disasters should have taught us that by now.

Public investment will make a positive contribution if it is financed by reducing other expenditures, done with quality and limited to cases where private investment is not feasible.

Increasing the deficit to make public investment with the current standard is only of interest to those who want to earn money from public works or make an easy speech.