Who controls the purse strings in the Brazilian government?

. Aug 10, 2020
budget checkbook in the Brazilian government? Image: Abscent/Shutterstock

The Jair Bolsonaro administration may be going through a defining moment regarding its economic policy. Some of the president’s key advisers — including the government’s military wing — advocate for increasing public spending in order to offset the economic effects of the pandemic and kickstart the economy. This would include major infrastructure projects, as well as social policies — in a clear strategy to make Mr. Bolsonaro’s re-election in 2022 viable.

These advisers are clashing with the government’s pro-austerity branch, headed by Economy Minister Paulo Guedes. Since the 2018 campaign, Mr. Guedes has been the “guarantor” of Mr. Bolsonaro’s economic policy — the insurance that the government would guide itself through pro-market reforms, employing the utmost zeal to tame public spending.

</p> <p>As the backdrop to this dispute, the government is <a href="">preparing its draft of the 2021 budget</a>, which must be submitted to Congress by the end of the month. At stake is one of the most effective instruments to tame the public deficit: the federal spending cap. Created late in 2016 amid considerable controversy, it states that the federal budget can only grow from one year to the next in order to match inflation.&nbsp;</p> <p>Behind the scenes, however, the government is trying to create breathing room to spend more money. Earlier this year, Congress voted on the creation of a so-called &#8220;<a href="">War Budget</a>,&#8221; creating a separate budget for spending related to the Covid-19 pandemic —&nbsp;and now the tug of war will decide if other spending areas will be included as &#8220;exceptions&#8221; to federal spending rules.</p> <p>Or, whether this parallel budget may be extended for an extra year —&nbsp;until December 2021.&nbsp;</p> <p>The Senate-affiliated Independent Fiscal Institute had already admitted there is no space to increase expenditures without breaking the cap. For 2021, mandatory spendings — including pensions and payroll — are likely to swallow up almost all of what is available.</p> <p>Alessandra Ribeiro, director of Macroeconomics and Sector Analysis at consultancy firm Tendências, tells <strong>The Brazilian Report</strong> that the risk of noncompliance with the spending cap and fiscal disorder is increasing.</p> <p>“The dispute is very heavy and will define what the government will be. Our risk perception regarding the fiscal framework, the changing in the spending cap, has increased a lot,” says the economist. “There is pressure for more expenses, whether that be with investment in public works or with an income program. These ideas gained strength with the pandemic because there were substantial effects on the economy. Add that to the <a href="">municipal elections</a> [to be held later this year] — in which this type of plan helps candidates — and the slowness expected for economic recovery.”</p> <iframe src="" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <h2>2021 budget: the battle over &#8216;Brazil&#8217;s Marshall Plan&#8217;</h2> <p>Issued from the barracks, cabinet members Walter Braga Netto (Chief of Staff) and Tarcísio Freitas (Infrastructure) have joined forces with Regional Development Minister Rogerio Marinho to launch a plan dubbed by government officials as &#8216;Brazil&#8217;s Marshall Plan,&#8217; consisting of a vague list of potential infrastructure projects that would create jobs and reverse the recessive cycle. But Economy Minister Paulo Guedes compared the project to &#8220;pickpocketing the government.&#8221;</p> <p>“We cannot be deceived. Growth comes from private investment, tourism, the opening of the economy, reforms. (&#8230;) Brazil failed because it followed the developmental model, Brazil stagnated. The policy was corrupted; the economy stagnated through excessive public spending. How is a broken government going to make big public investments?”</p> <p>Brazil&#8217;s Marshall Plan was presented in April but has made no progress since. Officially, the cabinet ministers are currently analyzing which projects will be the priorities before releasing the list. The Infrastructure Ministry has reportedly <a href="">requested</a> BRL 40 billion (USD 7.5 billion) for projects, while Mr. Marinho wants BRL 35 billion. Local daily newspaper O Globo states the <a href="">final list</a> should be disclosed before September.</p> <figure class="wp-block-image size-large"><img loading="lazy" width="799" height="533" src="" alt="budget Paulo Guedes publicly compared the &quot;Brazilian Marshall Plan&quot; to “pickpocketing the government.” Photo: Marcos Corrêa/PR" class="wp-image-46025" srcset=" 799w, 300w, 768w, 610w" sizes="(max-width: 799px) 100vw, 799px" /><figcaption>Paulo Guedes publicly compared the &#8220;Brazilian Marshall Plan&#8221; to “pickpocketing the government.” Photo: Marcos Corrêa/PR</figcaption></figure> <p>Tarcísio Freitas was the guest on the July 31 edition of President Jair Bolsonaro&#8217;s weekly live social media broadcasts. For almost an hour, he discussed his plans to resume work on infrastructure projects that are suspended due to a lack of funds.</p> <p>The president&#8217;s eldest son, Senator Flávio Bolsonaro, publicly backed Mr. Freitas. “It’s an equation where you can’t do magic. On the one hand, Paulo Guedes does not want to spend because BRL 700 billion has already been spent fighting the pandemic. (&#8230;) On the other hand, I think there has to be some flexibility. (&#8230;) I believe that Paulo Guedes will have to find a way to get more money to continue these actions with a social and infrastructure impact,” the president&#8217;s son told newspaper <a href="">O Globo</a>.</p> <p>Economist Alessandra Ribeiro sees no space for this spending without changing the rules of the federal cap. “The point is that there is a lot to fit in; the calculation doesn&#8217;t add up. If the government increases spending by BRL 40 billion, the cap is probably already going to be breached.”</p> <p>According to Ms. Ribeiro, it is possible to accelerate public concessions to increase the amount of private capital in these projects. Still, this is not the most likely scenario and wouldn’t be completed in time for the 2022 election. “For this to happen, the macroeconomics has to be in order; it needs a perception of stability, that Brazil will fulfill its commitments. Without this macro stability, to attract long-term investors, this does not work.”</p> <iframe src="" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <h2>Support shifting and the emergency salary</h2> <p>The electoral process is something to be considered when analyzing the dispute over the funds. The pandemic has put stress on several different aspects of the government, beyond the management of public health. The fact that a significant share of the population is now out of work puts additional pressure on the president’s popularity.</p> <p>Mr. Bolsonaro lost part of his original support base with his poor management of the Covid-19 crisis, but he has been able to retain popularity by gesturing to new followers. As things stand, the president&#8217;s reputation is being propped up by a region of Brazil that used to oppose him, and a wealth transfer measure his own government was firmly against.</p> <p>At the beginning of the Covid-19 pandemic, Paulo Guedes was willing to provide unemployed and low-income Brazilians with an emergency salary of BRL 200 (USD 37) per month. After a long dispute and plenty of pressure from Congress, the Bolsonaro administration agreed to bump the value up to three monthly payments of BRL 600. Though it did so begrudgingly, this cash-transfer policy was the right move for Mr. Bolsonaro&#8217;s popularity. However, it comes at a monthly cost of BRL 50 billion for the public coffers.</p> <p>The emergency salary largely assisted families in the Northeast region of Brazil, where President Bolsonaro traditionally polled poorly. His popularity then increased, and he has made a point of visiting the region more frequently, launching public works and promising other infrastructure projects.</p> <p>A new alliance in Congress has influenced this shift. The <a href="">Big Center</a> — a group of small- and medium-sized conservative parties willing to exchange political support for control over parts of the budget — has agreed to side with President Bolsonaro, thus safeguarding the head of state from impeachment, for the time being. Many of the Big Center’s leaders hail from the <a href="">Northeast</a>, and rely on projects in the region to further their political goals.</p> <h2>The signs from Paulo Guedes</h2> <p>With his adversaries gaining importance, uncertainty about Paulo Guedes’ role in the government has emerged. According to analysts who spoke to <strong>The Brazilian Report</strong>, the Economy Minister is still seen as Mr. Bolsonaro&#8217;s <a href="">guarantor for the financial market</a>.</p> <p>Last week, Treasury Secretary Bruno Funchal <a href="">said</a> the ministry does not want to break the federal spending cap: “no way.”&nbsp;</p> <p>“We want things to be as transparent and as correct as possible,” said Mr. Funchal, one of Mr. Guedes’ closest assistants.</p> <p>According to economist Alessandra Ribeiro, the federal spending cap’s infringement could even result in the Economy Minister’s resignation. “We even see some signs that Mr. Guedes has been accepting more, but we don’t think he would approve fiscal irresponsibility. In our pessimistic scenario, he leaves the government in case it breaches the spending cap.”

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José Roberto Castro

José Roberto covers politics and economics and is finishing a Master's Degree in Media and Globalization. Previously, he worked at Nexo Jornal and O Estado de S. Paulo.

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