Floods in the State should increase public spending and put even more pressure on the government in its relationship with Congress, writes Mario Rosa
Former president José Sarney said that no one governs as long as they govern. The ruler governs the government, but does not govern the circumstances. And these can be magnificent, as they were in the president’s 2nd term Lulaor they can make hobby horses, as you well know Jair Bolsonaro and the collision of his government with the largest pandemic of the history of humanity.
It is in this sense that, from a political point of view, the tragedy in Rio Grande do Sul adds a new ingredient of difficulty to the current government’s already difficult journey.
In practical terms, the fact is that the country has become poorer. Brazilian GDP decreased with the loss of wealth caused by the devastating tragedy in Rio Grande do Sul and all its consequences.
In addition to the cost of reconstruction, in the billions of reais, there is the fiscal collapse of the State. And city halls. The financial strangulation of public machines, the disruption of the collection capacity, the need to fulfill obligations, such as the maintenance of basic services such as health, security and education and pensions.
There will probably be a need for expanded assistance programs for people from Rio Grande do Sul and lines of financing for micro and medium-sized entrepreneurs. Maybe big ones too.
How much will this all cost? There are dozens that add up to tens of billions and continue to add up. And there will, of course, be the cost of approving the cost. Yes, because in politics there will be a political price to be charged for everything to happen, commonly called “pass the herd”. Many other concessions will be necessary from the Lula government so that the Rio Grande package can become viable.
Perhaps there is some venomous vision here and some overly cautious emphasis. If there is, it is not on purpose. What I want to show is that unlike the so-called “luck” of President Lula, the tragedy in Rio Grande do Sul leaves his government facing its own fate. This could be a defining episode, in terms of difficulty, especially unnecessary, in placing the government in a zone of testing its limits on another level.
Why? Firstly, because 11 million people live in the State. It is the sum of 2 South American countries, Paraguay and Uruguay together. And a little more. In practice, 2 countries in South America, called Rio Grande do Sul, were devastated. Not only one “State”. And all this destruction will raise the bar on the already high level of fiscal spending.
Compared to the pandemic, where the total volume of public spending was lower, the country contracted a huge volume of emergency expenses that will increase the level of debt, with repercussions on fiscal and monetary parameters, the interest rate. And therefore growth. And maybe inflation. With the tortoises that can be included in the approval process for the “salvation” of Rio Grande do Sul, public spending is unlikely to decrease.
The government can achieve compensation with increases in taxes and assessments. But that doesn’t make it better, it makes the whole package worse. Conclusion: the tragedy in Rio Grande do Sul is a mini-pandemic from a fiscal and political point of view. However, it only affects 1 state in the country and has the potential to politically weaken the Lula government at a crucial moment.
It’s the kind of event that would have been better not to have happened. The consequences will be reflected in politics, of course. A government with such responsibility to face and resolve will drain a portion of its political capital.
Initially, the Congressional actors win and the government’s room for maneuver becomes narrower and more dependent on everything. The size of the problem is easy to see when we see its full resolution in the best possible scenario: everything is resolved, Rio Grande do Sul returns to what it was. At the cost of an enormous fiscal easing, a blow to the real economy, a yellow light on interest rates and all this for what? For a real concrete gain? For a growth program? At best, to recover what was lost and, even so, with a lot of anguish and longing.
Some might say: more spending, a stronger economy. But will the markets tolerate this vision or will private investment be held back? This is the unknown of the current government’s centralized and state investment model, applied for two decades: does it work in today’s world or does it scare away the capital that really makes the difference, the private investor? The Lula government faces luck in the tragedy of Rio Grande do Sul. Will it be lucky?
