The economic agenda in post-pension reform Brazil

. Oct 29, 2019
brazil economy minister paulo guedes agenda Economy Minister Paulo Guedes. Photo: Marcelo Camargo/ABr

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Good morning! We’re covering the government’s economic agenda for 2020. A move to make flying in Brazil cheaper. And a new rule to curb impunity? (This newsletter is for platinum subscribers only. Become one now!)

The economic agenda in post-pension reform Brazil

With the pension reform out of the way, Economy Minister Paulo Guedes is set to present Congress with a bold set of reforms, aimed at creating a new institutional framework for the country’s budget at all levels of public administration. His agenda has five axes:

</p> <ul><li><strong>Administrative reform.</strong> Mr. Guedes wants to reduce the number of civil servants, cutting their salaries and reducing their job stability. Per the World Bank, public-service employees earn on average 96 percent more than people in the private sector, and (almost) cannot be fired (which the government sees as a <a href="">deterrent to productivity</a>).</li><li><strong>Cutting mandatory expenses.</strong> By 2020, 94 percent of the federal budget will be eaten up by “mandatory expenses” (salaries, pensions, and benefits). This reduces the government&#8217;s ability to invest.</li><li><strong>“Base zero” budget. </strong>For core sectors such as healthcare and education, the government is unable to lower <a href="">budgets</a>—limiting the government&#8217;s choices in how the money is allocated. Mr. Guedes wants to change these rules.</li><li><strong>New federation pact.</strong> The minister wants new rules to decide how tax revenue is to be split between the federal administration, states, and municipalities.</li><li><strong>Financial aid to states.</strong> Most state-level administrations are on the cusp of financial collapse. The government wants to open up a credit line for them—conditioned to the adoption of austerity measures.</li></ul> <p><strong>Why it matters.</strong> With business owners afraid of risk, government-led investments are seen as crucial to promote growth. But without deep changes to how the federal budget works, these are impossible.</p> <div class="flourish-embed" data-src="visualisation/636801"></div><script src=""></script> <p><strong>Yes, but … </strong>Many organizations fear that giving the government carte blanche to draft its budget without its current constraints will lead to severe cuts in important areas like healthcare and education.</p> <p><strong>Pensions.</strong> One of the main sources of spending for state administrations is with salaries and pensions of their teachers and police officers—but both groups were left out of the pension reform. However, the Senate is set to present a new bill to advance in areas where the main reform failed to change.</p> <p><strong>Taxes.</strong> House Speaker Rodrigo Maia said on Monday he believes an administrative reform can only pass if Congress first makes progress with tax reform. The problem? The government has yet to endorse any of the three tax overhaul proposals in the House or Senate.</p> <hr class="wp-block-separator"/> <h2>Are flights getting cheaper in Brazil?</h2> <p>Infrastructure Minister Tarcísio Freitas announced the end of a USD 18.00 federal tax on passengers flying abroad, created back in 1999. The move is set to cut boarding fees in half. “When we have international flights at USD 50, there is no sense in having the government charging USD 18 from each passenger,” said Mr. Freitas.</p> <p><strong>Why it matters.</strong> The extinction of the tax is part of a wider set of policies aiming at fostering competition in Brazil&#8217;s highly concentrated air travel market—currently dominated by only three companies: Gol, Latam, and Azul.</p> <p><strong>What else?</strong> During the Michel Temer administration, the government allowed carriers to charge passengers for checked luggage in the hopes it would drive ticket prices down. It also greenlit airlines to be fully-owned by foreign groups, which attracted international low-cost companies. Earlier this year, President Bolsonaro has offered these low-costs the chance to operate domestic flights as well. Now, the government is trying to lure more players into the country.</p> <p><strong>Yes, but …</strong> The tax which the government has just ended is one of the main sources of funding for the National Civil Aviation Agency (ANAC), the sector&#8217;s regulating body. In 2018, it generated BRL 704 million. The government hasn&#8217;t said how it will compensate for this drop in revenue.&nbsp;</p> <hr class="wp-block-separator"/> <h2>Supreme Court proposes new statute of limitations</h2> <p>Supreme Court Chief Justice Dias Toffoli sent a proposal to Congress to alter how Brazil&#8217;s statute of limitations work. The new rules would allow the limitation period to be set off only while the case still has pending appeals.</p> <p><strong>Why it matters. </strong>The move comes just as the Supreme Court is close to finishing a trial on whether convicted felons can start serving their prison sentences before all appeals are exhausted. The chief justice is expected to cast the deciding vote, and this move suggests he will vote against enforcing sentences before all appeal routes are done with.</p> <p><strong>Split the baby. </strong>Justice Toffoli&#8217;s solution tries to appease all political groups. The left wants prison sentences not to be enforced while there are pending appeals—as it would benefit former President Lula—and the right wants an approach that would reduce impunity and keep Lula behind bars.</p> <p><strong>Impunity. </strong>Rich defendants have traditionally been able to avoid convictions by using the many loopholes in Brazil&#8217;s penal code to postpone their final conviction until their case reaches the statute of limitations. That has happened to one-third of cases pending before the Supreme Court.</p> <hr class="wp-block-separator"/> <h2>What else you should know</h2> <p><strong>Argentina.</strong> Kirchnerist candidate Alberto Fernández&#8217;s first-round victory in Argentina caused much volatility in the country&#8217;s stock market. That wasn&#8217;t the case in Brazil, though. The benchmark stock exchange index broke a new record (for the fourth time in five trading sessions), and the USD rate closed below the psychological threshold of BRL 4 for the first time in two and a half months. Analysts are waiting for Mr. Fernández to name his economic team before choosing to trust him or initiating &#8220;panic mode.&#8221;</p> <p><strong>Twitter.</strong> President Jair Bolsonaro&#8217;s official Twitter account shared a <a href="">video</a> in which he is depicted as a lion being surrounded and attacked by a clan of hyenas (which are labeled with the names of institutions such as the press, the Supreme Court, environmentalists, feminists—and even his <em>own</em> political party). After an expected backlash, Mr. Bolsonaro deleted the post—but not before it had gone viral. Celso de Mello, the longest-serving Supreme Court justice, said the video shows &#8220;the president&#8217;s lack of gravitas shows no boundaries.&#8221;</p> <p><strong>Pension reform.</strong> Unions representing federal civil servants are preparing lawsuits to challenge the recently-approved pension reform. They want to keep the perks enjoyed by the profession. Unions in the Justice system are planning a similar push.</p> <p><strong>São Paulo.</strong> Bruno Covas, the incumbent mayor of São Paulo, has been diagnosed with gastrointestinal cancer, having identified a tumor that has spread into his liver and abdominal lymph nodes. He will begin chemotherapy immediately. Mr. Covas, 39, however, won&#8217;t step down from his office—and will continue working as mayor from the hospital. Elected as deputy mayor in 2016, Mr. Covas took office last year when Mayor João Doria resigned to run for governor of São Paulo. Should he resign, too, a new mayor would be indirectly elected by the City Council to finish the term until December 31, 2020.</p> <p><strong>Traditional peoples.</strong> According to the Federal Prosecution Office, Brazil has roughly 650,000 families which identify themselves as traditional communities—indigenous, <em>quilombolas</em> (slave descendants), extractivist peoples, Romani communities, Afro-Brazilian religious communities, and riverside communities. This latest survey is the widest ever done in Brazil, but the real population of traditional groups remains much larger and underestimated.

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