Understanding Brazil’s new plan to overhaul the state

“We want a state that provides us with healthcare, education, sanitation. Instead of having a state of authorities, we want a state of civil servants, that serve the citizens. The public machine cannot keep feeding itself.” This was the rationale presented by Brazil’s Economy Minister, Paulo Guedes, when unveiling his ambitious initiative to redesign the Brazilian state, in a bid to balance public accounts and reclaim investment-grade status.

The plan delivered to Congress by President Jair Bolsonaro included three proposals to amend the Constitution, while other developments—such as administrative and tax reform—are set to follow. The goal is to make the federal budget more flexible and increase checks and balances to ensure financial responsibility for states and municipalities. Ultimately, either by reducing the number of municipalities or repaying debt, it aims to reduce the size of the Brazilian state, which currently has liabilities corresponding to 79.8 percent of GDP.

The plan is set to release an extra BRL 400 billion for states and municipalities over the next 15 years, coming from pre-salt oil royalties and transfers. This figure was initially slated at BRL 500 billion, but a reduction in the savings expected from the pension reform—from BRL 1.2 trillion to roughly BRL 800 billion—saw these levels scaled down by 20 percent. 

During the launch event, Mr. Guedes showed optimism about approving this set of measures after the struggle to pass the pension reform. He said that the proposals were built in cooperation with all levels of government and branches of power, and the decision to divide them into different bills was intended to make their approval more straightforward. 

“We built this pension reform together, but there was much more friction. Now we have more cooperation and there’s an exceptional political climate to do so. Congress is free to analyze it and I’m not afraid of it getting disfigured,” he said in a press conference, adding that each bill will follow a different timetable. 

Paulo Guedes’ new “federative pact”

The first amendment redesigns the financial relationship between states, municipalities and the federal government, commonly called the “federative pact.” It creates the Brazilian Fiscal Council, which will include the President of Brazil, the speakers of the Senate and House of Representatives, the Chief Justice of the Supreme Court, the head of the Federal Accounts Court, state governors, and mayors, who will meet every three months. This committee will monitor public spending, diagnose problems and issue recommendations to help in the fiscal management of the federal government and states and municipalities, acting alongside governors and mayors in the case of financial emergencies. 

...