Fiscal framework resembles a pact with the devil, says petista – 05/04/2023 – Market

A critic of the proposal for a zero primary deficit for next year, federal deputy Lindbergh Farias (PT-RJ) compares the proposal for a new fiscal rule presented by Minister Fernando Haddad (Finance) to the attempt at a demonic pact described in Guimarães’ masterpiece Rosa “Grande Sertão: Veredas”.

The PT claims that the announcement of the framework generated an expectation in the government of a reduction in interest rates projected by the market this year, which did not materialize.

“I remember ‘Grande Sertão: Veredas’, in which Riobaldo tries to sell his soul to the devil and the devil doesn’t even respond. That’s more or less what’s happening with the framework.”

In Lindbergh’s opinion, Haddad’s proposal to contain spending disregards the country’s current low-growth scenario —seen as disastrous by the deputy. “You know this National Congress. If unemployment increases, if there is this scenario of stagnation, consequently, there will be a drop in popularity and a political crisis”, he says.

He says he will discuss alterations via amendments to the government’s project and that, if possible, he will talk to Lula about the issue. “Perhaps there is an underestimation of the seriousness of the economic scenario. Some people may be thinking that things are not so bad. For me it is very bad”.

Why expose caveats to the fiscal rule now? Lula’s great strength is very much anchored in what his governments were. There was economic growth, job creation, income distribution… We are very concerned about the economic slowdown. Bolsonaro left a trap. He delivered an economy downhill. Of course, this is aggravated by the monetary policy of the [presidente do Banco Central] Robert Campos Neto. It is the highest interest rate in the world. It’s crashing companies. There were 103 cases of judicial recovery in February alone.

But for members of the left, the framework is better than the ceiling. Yes. But insufficient. The Focus bulletin brought a new GDP growth estimate. their prediction [mercado] for GDP it is 0.9% this year and 1.48% the other year. Politically it is disastrous for us. You know this National Congress. If unemployment increases, if there is this scenario of stagnation, consequently, there will be a drop in popularity and a political crisis.

How can PT act? Placing the agenda of growth and job creation as a priority. We no longer have monetary policy. At a time like this, any fiscal policy that means restricting investment and social spending could deepen the crisis and bring the economy down even further. Putting a monetary squeeze together with a fiscal tightening is a perfect storm. We want to contribute, help improve. This proposal came from the government. We’ll see when it gets written. It is trying to make changes, amendments, to improve the project and to mitigate the risks of making a mistake in making fiscal adjustments in the scenario of economic slowdown.

But the proposal provides for continued growth in spending. It might not be real. This zero primary deficit next year thing, we think is a mistake. I will try to influence the debate here in Parliament and internally in the PT. Haddad talks about increasing revenues by R$ 150 billion. But there are many variables. If the economy slows down too much, it becomes difficult to increase revenue. Many of these proposals have to pass through Congress. We know how lobbies work when it comes to ending exemptions. If he doesn’t manage to have that collection, by committing to that deficit, what will have to happen? Cost cutting, social programs.

Is the deficit the first point? Reviewing the zero primary deficit target is fundamental. This discussion of the framework, what did you think? If we present a framework, we can generate a situation in the market regarding interest rates and everything else. The Focus bulletin, which measures market opinion, was released today. It’s utter nonsense: [previsão é que o BC vai] maintain the rate of 13.75% until the end of the year. I remember “Grande Sertão: Veredas”, by Guimarães Rosa, in which Riobaldo tries to sell his soul to the devil and the devil doesn’t even answer. That’s more or less what’s happening with scaffolding. The scaffold enters and the devil didn’t even respond. The market maintained the same 13.75% [de previsão]. My concern is with the success of Lula’s government.

This was discussed with the President. Is Lula wrong? It didn’t make it to the bench. The PT did not meet to discuss this issue. There will be a lot of debate in Congress. There will be leaders of allied parties who will want to amend on one side. It is natural that the PT also presents suggestions and amendments. We want to improve the government project.

For example, what would those amendments be? The punishment has to be reviewed. Let’s say the economy slows down a lot and we don’t reach the goal next year, for example, of zero primary deficit with the 0.25 band above and 0.25 below. If you don’t reach the goal, it’s because the economy is too weak. Does it justify you reducing 2025 expenses more, instead of 70% to 50% of revenues only?

And the band? I think this 0.6% to 2.5% band could be more flexible. If we have a recession and the economy drops three points, we will only increase expenses by 0.6%. It is a very timid countercyclical action. On the other hand, if revenues increase a lot, as they were during the Lula government 1 and 2 there, if you limit it to just 2.5%, we are making a very big block.

When he spoke of the devil’s pact… In this case, it is Roberto Campos Neto’s market. We presented the framework and they didn’t even move. They maintained the projection of interest rates.

But isn’t that because it hasn’t been detailed yet? It has the international scene. See the latest Copom minutes. These guys are toughening up a lot. A thesis that is classic on the left is the following: when the economy is growing, you have a surplus. When the economy slows down, investment has a very large multiplier. We are tying the hands of our own government so that, at the moment of the slowdown, we do not have the only instrument available. Because there is another instrument which is interest rate policy, monetary policy. But they won’t give us a spoonful.

Is this the BC signaling, clear? Clear signage.

One argument is that the Copom has not yet captured the effect of the framework. In our opinion, this is a mistake. We have a president of the Central Bank appointed by Bolsonaro. There is the discussion about autonomy. Campos Neto is the greatest enemy of the success of the Lula government. He’s playing economics down there. These company breakers are people who took a loan at 2% and it’s at 13.75%. I think the government should think about tougher attitudes like the National Monetary Council, which can ask for the exchange. If we make a mistake in the dosage of this framework, it will turn into a monetary policy that is restrictive of growth with a fiscal policy that is also restrictive. That is a scenario that unfortunately I see two years of a lot of crisis. This is not fair to Lula’s own story.

Do you speak in the first person plural? Do you talk to other PT supporters who share the same concern? A lot of people worried. Everyone wanting to help. People want it to work. We want Haddad to succeed. That’s why we want to improve this fiscal rule.

But it’s not just Haddad. Lula approved this proposal. It’s a proposal from Haddad. It is a proposal from Lula. If I have the opportunity to speak with Lula, I will talk about the risks of this scenario. Perhaps there is an underestimation of the seriousness of the economic scenario. Some people might be thinking that things aren’t so bad. For me it’s very bad.

But Lula himself said that he is more optimistic than the market. Lula has always been an optimist. He has to say this. But he has to understand the risks embedded in this scenario. We have confrontation, polarization in society with the extreme right. This is important for the success of the Lula government, but [também] for democracy. We cannot accept that the market imposes a scenario of stagnation. This is devastating. I lived that year 2015 very intensely.

The economy weighed in for Rousseff’s removal. There we saw unemployment growing in 2015. That was the fuel for the whole process later against President Dilma. So I think we cannot accept this scenario that they are trying to impose on us. I would sleep. I sleep, but I think Lula has to think about two things: growth and job creation. We are self-imposing very strict fiscal rules. To win the trust of who, from Campos Neto, from that market there?

Did that surprise you with Haddad? It was said that Haddad’s choice would ensure that Lula would be heard on fiscal policy. Did that surprise you negatively? I think so, because they are selling a speech that Lula is buying. It is a speech that is the following: “let’s do all this from the revenue side”. So far so good. OK. What if it doesn’t work? By committing to zero primary deficit, we will have to cut in the middle of the crisis.

Why are you counting on a collection that you don’t know if it will materialize? I think that in Lula’s head is a lot of this: “it’s for revenue; I’m not going to cut expenses”. But the project, this zero primary deficit target, imposes this. Because if you don’t get the recipe, you’re going to have to cut it. If you don’t cut it, the next year, 2025, you’ll only be able to spend 50%. This is working with an uncertain scenario. It’s promising a lot. This can come at a very high price.

Should the government pick a fight and ask for Campos Neto to leave? This should already be being articulated in the Senate. Campos Neto’s tirade today is fundamental. He was placed by Bolsonaro. He participated in a group “Minister of Bolsonaro” now in January. He doesn’t want the government to work.