Brazilian ‘kitchen’ saves like a frog in a bain-marie – 02/06/2023 – Marcos Mendes

The text of the fiscal framework approved by the Chamber does not deliver the basics: it does not stabilize the public debt, the revenue and primary result targets are unrealistic, the spending limit is incompatible with the real increase in the minimum wage and other policies already announced.

Although most analysts agree with this diagnosis, there has been a positive reception to the text. The argument is that a bad rule is better than no rule at all, removing the risk of “Argentinization” of public finances.

It would also reflect a new role for Congress. By tightening spending limits, in relation to what was proposed by the Executive, the Legislative would be performing a desirable check and balance, a sign that agendas such as the end of BC autonomy, the reversal of the sanitation framework or privatization will not advance from Eletrobras.

Is very little. We are content to avoid disaster, but that risk is not far away.

One day after the approval of the PL in the Chamber, the government has already started to play against the rule. In opposition to the need to reduce tax benefits, the President and Vice President of the Republic announced new benefits for the automobile industry, for the production of solar panels and semiconductors, as well as the renewal of the Rota 2030 Program.

When the fiscal rule collides with reality, so much the worse for the rule. As with the spending cap.

The government is also advancing beyond the budget, escaping the scope of the fiscal rule: the BNDES is already operating with subsidized rates to finance innovation. First step towards ending the TLP, no-subsidy lending rate, which was an important reform passed by Congress in 2017.

Bonds issued by the BNDES will provide resources to resume the mistaken policy of subsidized credit to selected sectors, without the need for transfers from the Treasury recorded in the budget.

The other public banks will be called upon to make loans, without guarantees, to states and municipalities. State-owned pension funds are available to finance projects of doubtful viability. Petrobras takes the first steps in manipulating fuel prices.

Sooner or later, all this hits the public debt.

To what extent will Congress stop bad policies? It is unlikely that the Senate will play the role of check and balance, vetoing the appointment of people who are unsuitable for the Central Bank’s board of directors.

The Legislature also sponsors new and old tax benefits. It has already imposed on the Executive the extension of tax benefits to the events sector and Santa Casas. It is forwarding the renewal of the payroll exemption and benefits of Sudam and Sudene.

It is naive to think that the Congress of parliamentary amendments and interest groups has become, overnight, a guardian of good policies. At most, it will resist emblematic setbacks, such as the explicit repeal of recent reforms. However, in retail, business as usual, the weaker the Executive is, the more profitable and harmful to the public interest.

The positive surprise with GDP growth seems to indicate that bad scenarios are off the radar. Precipitation.

Calling an annual GDP close to 2% “pibão” gives an idea of ​​the mediocrity we have become accustomed to. Other indicators, with improvement at the margin, remain at a poor level. The stock exchange is at the same nominal level as in November 2019. Real interest 5.3% on long-term bonds is even good for those who paid 6.3% two months ago, but it is still a lot, reflecting uncertainty about the fiscal and inflation .

Furthermore, the penny does not fall at once. The frog is being cooked over a low heat without realizing it. When, for example, the Central Bank changed its monetary policy in September 2011, inflation expectations, although they reacted immediately, took a while to stabilize at a higher level. After the initial jump, they continued to rise little by little.

Similarly, the structural primary result fell systematically from 2007 to 2014, becoming negative in 2010, but there was only a rush in the market when the public debt lost its investment grade in 2015. disaster of 2014-16.

What has been celebrated is the chance to remain in mediocrity. Even that can be thwarted.

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