Lula bets on populism and shortcuts that lead to “chicken flights”

President Luiz Inácio Lula da Silva’s (PT) bet on immediate solutions and shortcuts to resolve complex issues in the economy was one of the landmarks of the first three months of government. A practice that tends to keep the country at the mediocre growth levels of the last four decades, when the country got used to “chicken flights”, in which brief bursts of stronger expansion are followed by long periods of near stagnation or even recession.

Fernando Veloso, a senior researcher in applied economics at the Brazilian Institute of Economics at the Getulio Vargas Foundation (Ibre/FGV), says that this has been the keynote of Brazilian growth, with the exception of a small period in the 2000s.

For this year, the projections of the Focus bulletin, from the Central Bank, point to an increase of only 0.9% of the GDP. Although more optimistic, even the projection of the economic team is for low growth: 1.6%. For the technicians of the Ministry of Finance, the year of greatest expansion of this mandate will be 2025, with GDP advancing around 2.8%.

These prospects only increase the temptation for populist measures to accelerate GDP at any cost. Lula was elected promising more growth and, when the IBGE announced a 2.9% increase in GDP for 2022, he said that “the economy has not grown at all”.

If the pursuit of sustained economic growth were a race, Brazil would be far behind. Since 1980, the country has grown at a rate of 2.3% per year, losing its share of world GDP, according to the International Monetary Fund (IMF). Since then, the global economy has advanced at an average pace of 3.4% per year. Brazil is only 92nd in the ranking of 135 countries for which there are complete data for this period.

Sustained growth, says Veloso, requires present sacrifices in exchange for future gains. “Permanent increases in productivity also depend on a business environment that facilitates the expansion of the most efficient companies, which presupposes an adequate degree of competition. It is also essential to ensure macroeconomic stability and regulatory predictability, so that individuals and companies have a favorable environment for making investment decisions”, says the economist.

Against this need, the PT government opts for a short-term vision, often populist, as evidenced by measures adopted or studied by the government since the beginning of the year. These are measures that, when applied, tend to generate distortions, privileges and impacts contrary to those expected. Among the examples are:

• the “by force” reduction of the payroll loan rate for INSS retirees and pensioners;
• the idea of ​​suspending the FGTS birthday withdrawal to supposedly “protect” the worker;
• the plan to resume the policy of subsidized interest rates at the BNDES; It is
• the R$200 airline ticket sales program.

This immediate logic seeks to capture votes or support for the government, says Cláudio Shikida, a professor at Ibmec-MG. The result is that potential benefits are distributed in the short term and the burden generally only appears in longer terms, often passed on to future rulers. “There is a logic of co-option of institutions by small groups”, he says.

Along the same lines, Veloso, from Ibre/FGV, says that immediacy leads the government to spend a lot on benefits that are focused on a minority. According to him, the measures planned by the new government reflect three typical practices of populism:

• the tendency to simplify complex problems that require coordination;
• the search for quick benefits; It is
• the search for visible and concentrated benefits, the cost of which is distributed throughout society.

For the economist, there is a general trend in Brazil towards this behavior. He recalls that, between 2021 and 2022 alone, three amendments to the Constitution violated tax rules: the Precatorios PEC, the Kamikaze PEC and the Fura-Teto PEC, which the elected government called the Transition PEC.

The latter alone allowed for additional spending of nearly R$170 billion this year, part for government social programs and part to meet demands from parliamentarians, after the rapporteur’s amendments were declared unconstitutional by the Federal Supreme Court (STF).

The result appeared in the form of increased fiscal risk and higher interest rates. Interest on NTN-B, a government bond indexed to inflation, has been increasing since 2021. Rates on bonds maturing in August 2026 rose from 2.18% in January 2021 to 5.66% this month, according to data from the Secretariat of National Treasury (STN).

Pendant on payroll interest pushed retirees to more expensive lines

The penny of the National Social Security Council (CNPS) in reducing interest on payroll for INSS beneficiaries is an example of a populist measure that generated negative effects – in this case, immediate ones.

Deeming the new rates unfeasible, private and even public banks, such as Caixa and BB, suspended the offer of this type of credit, pushing retirees and pensioners, many in vulnerable situations, to more expensive lines of credit.

The government was forced to back down. After dropping the payroll interest ceiling from 2.14% to 1.70% per month, the CNPS set a new ceiling of 1.97% per month last Tuesday (28).

Ending the FGTS anniversary withdrawal would eliminate a cheap line of credit

The Minister of Labor, Luiz Marinho, suggested putting an end to the FGTS birthday withdrawal method, that is, the annual withdrawal of funds from the fund by workers. According to him, this rescue distorts the function of the FGTS as a guarantee for workers in case of dismissal or to help buy a property.

“It is money that yields little in the hands of the government”, recalls Cláudio Shikida, a professor at Ibmec-MG. The remuneration is equivalent to the TR, currently zero, plus 3% per year. Meanwhile, an investment in the Direct Treasury, for example, can yield interest closer to the Selic rate, currently at 13.75% per year.

The birthday withdrawal also serves as a loan guarantee – and the rates for this modality are among the lowest in the market. Financial institutions charge from 1.49% per month. Meanwhile, the average rate on a personal loan, which does not require collateral, was 5.34% in February, according to the Central Bank.

In other words, the same government that wants to lower interest rates at all costs – either pressing the BC to reduce the basic rate or promoting pends on the payroll loan ceiling – could lead to the end of one of the cheapest credit modalities on the market.

The final decision should be made by Congress. The government promised, in early March, that it would submit a proposal requesting its extinction, offering alternatives.

One of the possibilities studied by the government is to use these resources to finance the Minha Casa, Minha Vida housing program. According to Shikida, with this the funds would be transferred from the workers’ fund to specific groups, such as contractors and builders.

A study by the Inter bank points out that R$ 28 billion in FGTS resources that were previously withheld ended up in the hands of workers in 2022. “The growth in adherence shows that the worker identified these benefits and, at the same time, the impact on the fund did not was significant”, highlights a report signed by the chief economist, Rafaela Vitória.

Return of subsidized interest at the BNDES may raise the cost of other loans

Another government idea to lower interest rates “by force” is to change the Long Term Rate (TLP), used as a reference in BNDES loans.

History shows that, by forcing more earmarked credit (as is the case with the BNDES), which is cheaper for some, the government ends up raising the cost of money for others – that is, most companies and consumers.

This occurs because the greater the share of earmarked loans in total credit, the smaller the reach of the Selic rate, used by the Central Bank to control inflation and which acts mainly on free credit. Thus, the BC ends up keeping the Selic at a higher level than would be necessary, making credit more expensive for those who do not have access to BNDES lines.

The participation of earmarked credit in the total balance of credit operations has lost strength since the Temer government, when the TLP was instituted. In December 2015, it corresponded to 50.4% of the total. In February, according to the Central Bank, they corresponded to 40.9%.

The risks are great. The alert was given by the BC in the minutes of the Monetary Policy Committee (Copom) meeting of March 21 and 22, which emphasized that the possible adoption of expansionist parafiscal policies, such as the release of earmarked credit by public banks, has the potential to raise the neutral interest rate and reduce the scope of monetary policy.

Tickets of R$ 200 for civil servants and retirees can raise the price for others

Another measure under study is the proposed sale of airline tickets at R$ 200 for people who have not traveled in the last two years. The measure would mainly benefit retirees and civil servants and would be made possible by a type of payroll loan from BB and Caixa.

The value proposed by the Ministry of Ports and Airports is equivalent to less than a third of the average tariff practiced by the three largest companies in the country last year, which together hold 99.6% of the market. According to the National Civil Aviation Agency (Anac), the average value was BRL 650.82, 39% more than in 2021.

The studies for the implementation of the measure are in the hands of the Secretariat of Civil Aviation (SAC) and must count on the participation of airlines and class entities such as the Brazilian Association of Airlines (Abear).

The risk of this type of measure is known and can be observed in the indiscriminate expansion of the “half income”. When the price is reduced for certain groups, it tends to be compensated by an increase in the “normal” price charged to the others.

Market received fiscal framework with relief, but there are doubts about viability

Amid populism and the search for shortcuts in the economy, one of the biggest concerns of the financial market and specialists in public accounts was about the fiscal framework designed by the government.

After Lula ordered the postponement of the presentation of the proposal, in what was interpreted as pressure for looser rules, the framework was finally presented on Thursday (30).

Although it foresees primary surpluses starting in 2025 and a relatively stable path for the public debt in the coming years, which made the market receive the proposal with some relief, the plan depends on a strong expansion in government revenues, which in turn will require, more than mere economic growth, the collaboration of Congress – in reviewing tax breaks, for example.

In addition, the rule makes room for growth in public spending even in times of falling revenue, which would worsen the situation of federal finances.