Why is it a bad idea to weaken your finance minister? – 06/11/2023 – Why? Economês in good Portuguese

Think of a lake where several people are trying to catch fish. The quantity of fish is limited. But the impact of each fisherman on the total number of fish is small. If I catch a lot of fish, it will have little effect on the total number of fish in the lake. So my incentive to “save” fish is small. Individually, the best strategy is to catch as many fish as I can.

The problem is that, collectively, this leads to disaster. With each fisherman trying to catch as many fish as they can, the amount of fish in the lake quickly dries up. The prosperity of the present turns into poverty in the future.

We can use this metaphor to understand the problem of government accounts. There are clear benefits to keeping your finances in order. It signals the stability of public debt in the long term, which wards off scenarios of default and high inflation in the future. Thus, lenders start charging a lower premium to lend to the government, allowing for lower interest rates. Furthermore, inflation expectations remain under control, which helps control inflation itself.

But these benefits are at the aggregate level – in our metaphor, they represent the total number of fish in the lake.

There are several individuals (congressmen, ministers, businesspeople, among others) who would like to expand spending on a specific item, or cut taxes for certain economic activities. These groups can often benefit from these measures, or simply believe that they are important for the country – and they may very well be important for the country.

When these individuals pressure the government for measures of this type, their isolated impact on the government’s aggregate finances is very small. They are like the “fishermen” of the lake. So, as there are individual benefits and little cost, the best thing to do is put as much pressure on the government to release resources for the item that is dear to it. The problem is that the most diverse interest groups will do the same, so the result is a general outcry that threatens the government’s finances.

But there is an important figure who helps to discipline this mess: the Minister of Finance. His role is to make the budget restriction explicit, making it clear to the “fishermen” that, if everyone tries to fish as much as possible, the fish in the lake will run out.

For this to work, the minister needs the support of the President of the Republic. However, if the head of government disauthorizes it and says that its main economic policy, the fiscal framework, will not be fulfilled without even being put to the test, it is a sign that we are in trouble and a message to fishermen that they can attack the lake at will.

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