“I recommend this article by Bráulio Borges, economist at FGV, about the recent dynamics of public accounts,” tweeted Fernando Haddad last Thursday.
Below the comment, the minister posted the link to the text Changing goals and the challenge of Brazilian fiscal sustainabilitypublished by Bráulio on the website of the Fiscal Policy Observatory of the Brazilian Institute of Economics (Ibre), of the Getúlio Vargas Foundation.
The reading suggestion caused a small uproar in Faria Lima. Haddad won praise from the market and attacks from the left.
All because, among several points analyzed in the article, Bráulio states that, in relation to social security expenses, “a crucial element to contain its expansion would be the decoupling of the social security floor (and even other assistance benefits) from the national minimum wage.”
It was this section that caused the most noise. In the interpretation of some analysts, Haddad would be signaling his willingness to buy into the political fight to extinguish the link between values – an almost taboo for PT members.
This automatic indexation represents one of the biggest causes of the imbalance in the accounts of the General Social Security Regime (RGPS), the social security system for workers in the private sector. Real increases in the minimum wage – a policy taken up by the current government – deepen the imbalance in public accounts.
“Social security expenditure already consumes almost half of the Union’s total expenditure and is not fully financed,” Bráulio told the Brazil Journal.
Economist at LCA and associate researcher at Ibre/FGV, Bráulio shows in the article that social security benefits were mainly responsible for the increase in federal government expenses in recent decades. If they are excluded from the calculation, spending is at levels similar to what it was in 1988, when the new Constitution created the link.
In the following interview, Bráulio comments on the need to reverse the primary deficit, criticizes the flexibility of the new fiscal framework and explains why social security benefits should not follow the minimum readjustments – despite not believing that there are political conditions to put this reform into effect. agenda at the moment.
What motivated you to write the article recommended by the minister?
The starting point was the government’s decision to send the PLDO (Budget Guidelines Bill) to Congress to revise downward the fiscal targets for 2025 and 2026. I considered it to be negative. The account is simple. Brazil needs a primary surplus of at least 1%, 1.5% of GDP every year to stabilize public debt. The longer we stay below this, the more our debt will grow and for longer. And then the question is, is our debt today high or low? Our debt is high.
There are many people who say that it is not that high, that this is tax terrorism.
There are several discussions about the level of debt, whether there is a certain level above which this is bad for the country. I will use a more direct argument.
Brazil lost its investment grade in 2015. The emerging countries that are at the first level of investment grade have a public debt of 55%, 60%. Brazil has a public debt of 80%. If we ever want to return to investment grade, we need to get debt under control.
Being investment grade has several advantages; for example, we can finance ourselves by selling public bonds to an international pension fund. Having the seal of good payer has positive, effective implications. If we want to return to investment grade, our public debt needs to fall to at least 60% of GDP. But to fall first it has to stop rising.
It has been rising – practically non-stop – since 2015. Today it is close to 80% of GDP, that is, increasingly distant from 55%, 60%. Hence the need to generate a primary surplus that at least initially stabilizes the debt, in a second moment, gradually – I am not an advocate of shock therapy, shock therapy can even be counterproductive – in a second moment, it generates a trajectory of gradual decline of the debt.
It’s not just because of the investment grade. If a crisis comes and Brazil needs to adopt a countercyclical fiscal policy, as was the case with Covid, countries that have lower debt levels naturally have greater fiscal space. Build this buffer Countercyclical is also a justification for having low public debt in good times.
Therefore, there is a need for fiscal consolidation. What is this, in plain English? We need to go from a deficit of 1% of GDP to a surplus of at least 1% of GDP. That’s 2 percentage points of GDP.
There was an awareness within the economic team back in March last year that we would need to reach a primary surplus of at least 1% of GDP to be able to stabilize the public debt and thus aim, for example, to regain investment grade.
But there was an increase in spending, with the Transition PEC and the increase in spending on Bolsa Família.
What was the impact on the accounts?
The worst thing about spending on Bolsa Família is that we increase a permanent expense without due compensation. The Fiscal Responsibility Law is being trampled on in Brazil.
Article 14 of the LRF says that we cannot increase permanent expenditure or generate a permanent revenue waiver without due compensation, so as not to generate an impact on fiscal sustainability. We have done this frequently – and so has Congress, despite the Executive.
In the recent case, it was even justifiable to expand the protection network because of Covid. It had an important effect on reducing extreme poverty. But you need permanent financing for this. Spending on Bolsa Família was 0.4% of GDP per year and became 1.5% of GDP.
We need to cut other expenses or increase revenue. This was not done by the Transition PEC. The Transition PEC increased spending and said, ‘I’ll look for revenue later.’ Then this agenda of seeking revenue, of fiscal consolidation all on the revenue side, began.
This strategy fell through the cracks, because the government even managed to approve a lot of things, but then Congress comes and extends Perse (Emergency Events Sector Resumption Program), the payroll tax exemption will be extended and expanded to states and municipalities, and here comes the Quinquênio PEC. It’s drying ice.
The burden of complying with the Fiscal Responsibility Law lies strictly with the Executive, which needs to constantly erase these bombs that come from the Legislature and sometimes even the Judiciary.
What is the viability of the fiscal framework?
The framework placed a limit – high, in my opinion – of growing expenses by 2.5% per year, for a potential GDP of 2%.
The problem is that not all expenses grow at a maximum of 2.5%. Social Security grows above this, even more so with the policy of increasing the minimum wage.
Minimum health and education spending was once again linked to income. So, if the government is increasing the tax burden, health and education expenses automatically increase. But isn’t it good to spend more on health and education? It’s good, but it needs criteria.
In practice, the spending rule approved last year did not limit all spending. It limited overall spending, but there are several expenses in there with big weights, with a big impact on total spending, without limit. This is the case with social security expenses.
The National Treasury itself pointed out that with the fiscal framework, discretionary expenses, which is where investments are located, tend to zero.
That’s why I comment in the article that, in light of the empirical literature, successful adjustments are made up of more or less half a reduction in expenses and half an increase in the tax burden.
Brazil seems to have insisted on extremes. First with the previous spending cap, which was just an expense, and now with this more recent strategy of looking only at revenue. We need to reevaluate this.
Social security expenditure already consumes almost half of the Union’s total expenditure and is not fully financed. The RGPS deficit (General Social Security Regime) closes to 3% of GDP.
This is the point that resonated most in your article, when you talk about the need to delink social security and social benefits from the minimum wage. What are the chances of the government taking this discussion forward?
Politically, I think it’s impossible in the next few years. First, it is a more left-wing government. Second, we are already approaching the next election. We have already passed the initial period when the new government has more political capital.
But many analysts say that only a left-wing PT government could tackle an agenda like this.
I think a left-wing government at the beginning of its term. The political calculation weighs heavily, whether in the left or right government, when the cycle of electoral politics begins.
Only a left-wing government at the beginning of its term would have a little more capacity to approve a broad pension reform, including carrying out these delicate discussions about linking the pension base to the minimum wage.
The minimum wage must be readjusted to reflect productivity, it does not have to be frozen. The minimum is of enormous importance in the labor market, where bargaining power is often more on the side of employers than of employees.
But minimum wage is a variable to regulate the labor market. For those who are already retired, are pensioners, the minimum wage should not have a real adjustment in value.
Obviously, this is a highly unpopular topic, particularly from the point of view of those on the left. Amid the repercussions of Minister Haddad’s tweet, they even called me a killer of old ladies.
Giuliano Guandalini
