State finances are the biggest risk for Brazilian economy

At this point, the approval of Brazil’s pension reform is considered by analysts as a matter of time. But, while it is set to give the federal government much-needed financial relief, the ruin of Brazilian states and municipalities is set to continue. 

In order to avoid further delays to what is the backbone of the government’s economic agenda, senators decided to split the pension reform into two pieces of legislation. As editor-in-chief Gustavo Ribeiro explained in our September 4 Daily Briefing, one bill preserves the text approved by the lower house, without changes, while another includes all the changes senators want, such as the inclusion of state- and municipal-level servants in the new retirement rules. With the reform being split into two pieces of legislation, the core of the proposal could be sanctioned as early as November.

The debate on whether to include states in the reform started in the House of Representatives. In the end, members of the lower house decided against it, in order to preserve their own political interests. Pension reforms are always unpopular, and lawmakers considered that state governors—i.e. those who would benefit the most from the alteration—didn’t show enough support for the bill, leaving the political burden solely upon Congress.

From a purely electoral perspective, the reasoning makes sense. But members of Congress should perhaps be concerned about their states going completely bankrupt.

Currently, seven of Brazil’s 27 states have declared financial calamity. They are: Rio de Janeiro, Minas Gerais, Rio Grande do Sul, Goiás, Roraima, Rio Grande do Norte, and Mato Grosso. In practical terms, the move shuts down several areas of state administrations and delays salaries for civil servants (which are then paid in delayed...