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Paulo Guedes is losing the battle for Brazilian public spending

. Aug 12, 2020
public spending paulo guedes brazil economy minister Paulo Guedes: "Super" he is no more. Photo: Valter Campanaro/ABr

On August 10, The Brazilian Report’s José Roberto Castro explained the internal struggles within the Jair Bolsonaro administration over control of the federal budget. The tug of war opposed the Friedmanites in the Economy Ministry — in favor of a hands-off approach to the economy — and the government’s military wing, which supports massive spending on infrastructure to generate wealth and development. Just one day later, it seems clear that the latter is winning the war.

Privatizations Secretary Salim Mattar and Debureaucratization Secretary Paulo Uebel resigned on Tuesday evening, citing frustration with the lack of progress in the ultra-liberal agenda the government has proposed for the Brazilian economy. In 2018, Economy Minister Paulo Guedes promised a wave of privatizations to shrink the “mammoth-sized Brazilian state.” Even sacred cows such as oil company Petrobras would be handed over to private control. But so far, the administration has not managed to privatize one single company, aside from a few subsidiaries.

</p> <p>And the state continues to be just as enormous as it was when Mr. Bolsonaro took office in January 2019.</p> <p>Many of the libertarian economists in the government say — sometimes openly — that the president is caving to calls for enhanced public spending amid the pandemic, a vision diametrically opposed to what Mr. Guedes believes in. It is worth remembering that the Economy Minister argued in favor of an even <em>smaller</em> presence of the state in the economy, as the coronavirus started to <a href="https://brazilian.report/power/2020/04/05/brazil-moves-protect-companies-during-covid-19-pandemic/">ravage companies</a>.</p> <p>But the promise of a huge infrastructure program to boost Mr. Bolsonaro&#8217;s chances of reelection is now growing more popular within the administration, making the Friedmanites increasingly disgruntled.</p> <p>Since the start of Mr. Bolsonaro&#8217;s term, eight top members of the government&#8217;s economic team have resigned — many out of frustration by the futility of their efforts, as was the case of former Banco do Brasil CEO Rubem Novaes, who <a href="https://brazilian.report/newsletters/brazil-weekly/2019/08/24/brazil-privatization-plan-pros-cons/">failed to privatize</a> the bank, or former Treasury Secretary Mansueto Almeida, who spoke out against the extension of cash-transfer policies in the name of fiscal balance.</p> <p>Mr. Guedes has called the exodus of top-flight staffers a &#8220;stampede.&#8221; He also said the government &#8220;must do the right thing&#8221; in order to allow Mr. Bolsonaro&#8217;s re-election. The right thing, in his opinion, would be <em>limiting</em> the deficit, not inflating it. He also suggested that trying to breach the federal spending cap — a constitutional instrument to limit the deficit any given administration can create — could even cost Mr. Bolsonaro his job. &#8220;The president&#8217;s advisers who tell him to go over the cap are leading him to a dark place, an impeachment place, of fiscal irresponsibility. The president knows that and he has backed us,&#8221; <a href="https://blogs.oglobo.globo.com/miriam-leitao/post/recados-de-paulo-guedes-tem-endereco-certo-o-presidente.html">said</a> Mr. Guedes, in an interview.</p> <h2>Paulo Guedes, the super minister that never was</h2> <p>A self-declared illiterate in economics terms, Mr. Bolsonaro exhaustively repeated that reporters in the 2018 campaign were to ask all of their economy-related questions to his future &#8220;super minister,&#8221; Paulo Guedes. And indeed, at first, Mr. Guedes did appear to be an economic tsar, heading the mammoth Economy Ministry that was the result of <a href="https://oglobo.globo.com/economia/fusao-de-pastas-na-economia-faz-governo-cortar-29-mil-cargos-23415343">merging four cabinet ministries</a>: Finance, Industry and Trade, Planning, and Labor.</p> <p>With these enhanced powers, Mr. Guedes promised to scrap the public deficit within a single year and deliver annual growth rates of around 5 percent. Even before the pandemic, the government had utterly failed on both targets. </p> <p>GDP growth parked at 1.1 percent last year. And while financial results for 2019 were the best in six years, the <a href="https://brazilian.report/newsletters/brazil-daily/2020/01/30/brazil-public-deficit-smaller-dilma-coronavirus/">budget deficit stood at BRL 95 billion</a> — or 1.31 percent of the GDP. Even before the pandemic, there was little chance that Brazil’s public accounts would return to black before 2022. Moreover, Mr. Guedes promised to raise BRL 1 trillion from privatizations by year-end — but the sales he made were worth just 15 percent of that figure.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1302427" data-url="https://flo.uri.sh/visualisation/1302427/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>But in fairness, that isn&#8217;t just the Economy Minister&#8217;s fault. His agenda was <a href="https://brazilian.report/power/2020/04/26/the-end-of-the-superministers-will-guedes-part-ways-with-bolsonaro/">never fully backed</a> by a president whose track record in Congress shows no alignment with a hands-off fiscal philosophy. Over his nearly three decades as a congressman, Mr. Bolsonaro repeatedly opposed the privatizations Mr. Guedes dreams of.</p> <p>The pension reform — the sitting administration&#8217;s major economic achievement — passed in Congress <a href="https://brazilian.report/power/2018/12/05/jair-bolsonaro-guedes-pension-reform/"><em>despite</em> the president</a>, not thanks to him.</p> <p>As a matter of fact, outgoing Privatizations Secretary Salim Mattar said in an <a href="https://br.noticias.yahoo.com/liberais-purosangue-no-governo-cabem-em-um-microonibus-diz-salim-mattar-170900388.html">interview</a> that &#8220;the bonafide libertarians that actually made it into the administration wouldn&#8217;t fill a minibus.&#8221; He said: &#8220;True outsiders will eventually leave [the government], while members of the state apparatus will perpetuate themselves — and cling on to the status quo. […] The idea of reducing the size of the state to unburden citizens is applauded — but not really supported.&#8221;</p> <p>That lack of commitment to his campaign promises has cost Mr. Bolsonaro some of his staunchest supporters among the business class. Mega-investor Winston Ling — who introduced Mr. Bolsonaro to Mr. Guedes — has jumped off the bandwagon. &#8220;We risk seeing the state gobbling up everything, profiting from this farce of a pandemic. Spending could go up, so could taxes. How can we make this add up?&#8221; he told newspaper Folha de S.Paulo.</p> <p>According to Synésio Batista da Costa, chairman of the Brazilian Toymakers&#8217; Association, the &#8220;stampede&#8221; we&#8217;re seeing is the result of the government&#8217;s failures to implement a liberal agenda. &#8220;Why couldn&#8217;t Salim [Mattar] sell companies? Because there&#8217;s always someone blocking the deal,&#8221; complained the former Bolsonaro supporter.</p> <p>Erich Decat, political analyst at XP Investimentos, believes the &#8216;stampede&#8217; will grow even stronger. &#8220;This process began in April, when we saw conflict between the liberal wing of the government and the branch that supports increased spending. Since then, it has been intensifying. These exits came as a result, and there will be more,&#8221; he tells <strong>The Brazilian Report</strong>.</p> <p>The reaction was so fierce that President Bolsonaro called a press conference on Wednesday afternoon, in an attempt to show supporters in the business class that everything is running slowly. According to Mr. Decat, however, this couldn&#8217;t be farther from the truth.</p> <p>&#8220;Salim [Mattar] was the biggest enthusiast of [Mr.] Guedes&#8217; privatization program, but he soon noticed it wasn&#8217;t moving forward, so he left. There are some who say his exit will make the privatizations progress, but that is unlikely,&#8221; he adds.</p> <h2>The president and his VP promise not to raise spending</h2> <p>On social media, President Jair Bolsonaro tried to calm the markets and claimed that fiscal responsibility and the federal spending cap are the government&#8217;s economic cornerstones. &#8220;The state is swollen and [we must] get rid of its loss-making companies, as well as those which would be better run in private hands. Privatizing is far from just placing a state-owned company on a shelf and handing it over to the highest bidder.&#8221;</p> <p>Earlier on Wednesday, Vice President Hamilton Mourão stated that Brazil&#8217;s fiscal situation is &#8220;terrible&#8221; and that the spending cap remains the country&#8217;s &#8220;fiscal anchor.&#8221; Asked whether there was conflict within the government, Mr. Mourão said there are ministers who are &#8220;desperate to produce results,&#8221; but have come up against budgetary limits. He did not cite who he was referring to.</p> <p>&#8220;Ministers that want to increase the spending, they have to sit down with the government, show their objectives and have it discussed, debated and voted on by all, then the president will decide,&#8221; added Mr. Mourão.

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Renato Alves

Renato Alves is a Brazilian journalist who has worked for Correio Braziliense and Crusoé.

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