Ignoring the constitution

Is Brazil’s government funding families or a re-election campaign?

As Covid forced Brazil’s poorest families to endure an even harsher than normal reality, the administration of president Jair Bolsonaro (“Bolsonaro”) announced that it would replace the Bolsa Família social welfare programme with its own version. The problem was that the new version, Auxílio Brasil, was essentially the old version but even more unaffordable than its predecessor. Ostensibly, the programme is designed to help poor families pay bills and pay for basic items. To a cynical observer of Brazilian politics, the programme is also a convenient vote getter for an unpopular incumbent ahead of presidential elections scheduled for October.

An analyst at a São Paulo asset management firm explained, “The problem is that the fiscal drain, given the cost of the programme, is simply not sustainable and the government will soon have to breach the spending cap to continue making the cash transfer payments. Doing so would be unconstitutional.”

“The problem is that the fiscal drain, given the cost of the programme, is simply not sustainable and the government will soon have to breach the spending cap.”

Analyst, asset management firm, Brazil

Given that the government recently floated making the cash transfer payments permanent, the scenario hits a little close to home. Brazil’s spending cap has been a useful tool to limit government spending and, crucially, protects health and education budget increases. Fiscally, the problem is that once cash transfer payments are made, it is difficult to wean people off them especially at a time when Brazil’s economy is simply not producing enough jobs to entice people to leave the safety net.

The transfers are adding to already mounting government debt and domestic economic stimulation, which should have been spurred by consumer spending is unlikely to come to fruition. That’s because double-digit inflation is increasingly eroding the purchasing power of these transfers – i.e., the government is sustaining high public expenditure at a time when the economy is giving little in return, inflationary pressures will keep momentum sluggish at best.

A member of the economic department of a leading Brazilian think tank and university in Rio de Janeiro and São Paulo explained, “There is a temptation to make emergency cash transfers permanent, if politicians were to make the popular cash transfers into a permanent policy without cutting other mandatory spending to offset it, then the spending cap law would be violated. The intense sell-off seen in Q4 2021 when Bolsonaro decided to bend the fiscal rule was a reminder that fiscal risks remain high in Brazil.”

“The intense sell-off seen in Q4 2021 when Bolsonaro decided to bend the fiscal rule was a reminder that fiscal risks remain high in Brazil.”

Economist, leading Brazilian think tank

Having said that, economy minister Paulo Guedes remains convinced of his ability to pass the income tax reform and administrative reforms before the elections, which the administration believes will provide some fiscal breathing space.

Removing the spending cap will exert a significant impact on Brazil’s growth but broadly, economic indicators remain poor. The São Paulo Stock Exchange has lost 13% of its value this year, whilst the BRL is one of the worse performing currencies in the world, interest rates have risen from 7% to expected 12%.

At a time when Brazil should be working to incentivise foreign investment it is instead returning to the era of unsustainable social welfare. Not only that, “Auxílio Brasil complicates the transfer of income to the poorest because it creates several other merit-based benefits, which compete in the budget with the essential transfer,” remarked the think tank professional. Sad then that political considerations will continue to cloud more effective, and sustainable, policymaking in Brasília.

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