Ignoring the failure of austerity in Europe, Brazil’s President Dilma Rousseff decided to follow the same path and announced spending cuts of her own in an attempt to ease pressure on the Brazilian stock market displeasing most of the people who recently re-elected her in the process
By Wagner de Alcântara Aragão
In her inaugural address for her second term as president of Brazil, Dilma Rousseff said there would be “no step back” in relation to social achievements of the past 12 years – the first four from her own government and the previous eight from former president Lula. The statement was in line with her campaign promise, when she said workers’ rights would not be affected in her new government. Less than 20 days into the new administration, however, Rousseff categorically contradicted this statement. If she continues on this track, the campaign promise will also go down the drain rapidly.
On 19 January, Brazil’s new Finance Minister, Joaquim Levy, announced a series of measures in order to increase revenue and cut Union expenses. The so-called “fiscal adjustment” was expected since the end of December, when – to the amazement of those who believed a second Dilma government would be more progressive – the president confirmed conservative Levy’s position in office. The measures include increasing the tax burden on personal credit and products such as fuel, cosmetics and imported goods in general.
These measures are added to others taken in late 2014, which made the concessions of social benefits such as unemployment insurance, salary bonuses, sick pay and death pension more difficult. The package has also a provisional measure signed by Rousseff that increased by 4.5% the limit for exemption of income tax – lower than the annual inflation rate of 6.41% recorded in 2014 (Congress had approved a 6.5% correction, but the president vetoed). The Central Bank put the icing on the cake by raising interest rates to 12.25%, the highest since July 2011.
With the measures set out in January, the federal government expects to raise 20.6 billion reais in tax collection in 2015. With the restriction on benefits announced in December, it is estimated that 18 billion reais will be cut from Union spending. As minister Joaquim Levy aims to reach 60 billion reais of savings, there are still 22 billion reais to axe.
Judging from Levy’s actions, this government’s grip on the public accounts will focus on measures that mainly affect employees and middle-class income, as well as the productive sector. Millionaires and the financial markets, however, will be spared.
For the financial markets, the package is a good indication that Rousseff’s government will be more committed to fiscal responsibility in the second term. The measures taken so far aim at a primary surplus target of 1.2% of Brazil’s GDP in 2015. Primary surplus is what the government saves for the payment of interest on debt – formed basically by government securities sold in the financial market.
SIZE OF THE HOLE
Brazil’s public sector – federal, state and municipal governments and state companies – registered a primary deficit of 32.5 billion reais in 2014. In 2013, there was a surplus of 91.306 billion reais. It was the first time since the start of the series of the Central Bank, in December 2001, that the public sector ended the year with a deficit.
The Central Government – National Treasury, Social Security and Central Bank – ended 2014 with a primary deficit of 17.2 billion reais. It was also the first time that the primary result was a deficit since the beginning of the current series, which began in 1997. Thus, the amended primary surplus target for 2014, which was 10.1 billion reais (the original target of 80.7 billion reais was reduced due to the drop in revenues and increased spending), was not achieved.
The data refers to the primary deficit because it is the difference between income and non-interest expenses, excluding income and expenses with interest. With a deficit, the government lacks money to pay debt interest, whose expenditures reached 311.4 billion reais in 2014 (6.07% of GDP), compared to 248.9 billion reais (5.14% of GDP) in 2013. The nominal deficit formed by the primary balance plus interest expenses, reached 343.9 billion reais last year (6.7% of GDP).
For the deputy head of the Economic Department of the Central Bank, Fernando Rocha, lower economic activity and the consequent drop in tax revenues contributed to the negative results as well as the exemptions granted to specific sectors of the economy by President Dilma. “In 2013, we had growth of 2.5% of GDP. In 2014, we do not know, but the result will be significantly lower. This results from lower tax revenues. Another factor is the exemptions, estimated at just over 100 billion reais. Finally, the growth of expenditure on investments,” Fernando Rocha said.
No one argues that Brazil really needs an adjustment. The cutbacks alone, however, do not guarantee that there will be a return of economic growth. What the government expects now is to regain market confidence and awaken the “animal spirit” of the private sector to re-invest and consequently heat Brazilian production – as increased public investment does not seem to be an option.
CONTRAFLOW
Examples from outside Brazil justify questioning the effectiveness of these measures. The fiscal adjustment that Dilma Rousseff’s government will put into practice has been adopted by the eurozone since 2009, when the effects of the global economic crisis erupted a year before. Since then, the European economy has alternated between recession and stagnation, with high unemployment (especially among young people) and outbreaks of social unrest – marked, in some countries, by xenophobic attitudes of people who blame immigrants for the financial crises.
The consequences of European austerity come to the point that monetary authorities begin to worry. The European Central Bank announced easing measures in order to increase economic activity and reverse the ongoing deflation process.
From the US came another demonstration of how Brazil’s new economic team seems to stand against the flow. In the traditional Union of the State speech, President Barack Obama defended the introduction of government measures to stimulate job creation and universal rights such as health and social security. Obama spoke of lowering taxes that reach workers and help families who cannot afford to pay for basic services. To afford it, he indicated he may propose to raise taxes of the wealthiest families in the country.
In this sense, and given the uneven economic reality in Brazil, despite recent advances, Brazil could put in place a tax on the wealthy – a mechanism predicted in the 1988 Constitution, but never regulated by Congress. According to “Tax on large fortunes” published by economist Amir Khair in 2003, a 1% tax on wealth declared to the tax system by individuals and companies would provided tax revenue of 1.89% of GDP, at least.
Other measure would be to correct tax distortions. One example is the payment of 27.5% of income tax both for those receiving a monthly salary of 4,080 reais and by those paid 408,000 reais a month, according to the table of income ranges in practise nowadays.
REPERCUSSION
The adjustment plan is reported in the mainstream media as a necessary badness. The major television and radio stations in the country and the websites of the largest commercial newspapers, which are usually critical when it comes to “populist” measures, do not criticise the consequences of the government fiscal adjustment.
From the opposition, which has the PSDB (Social Democrats) as the principal voice, the criticism is more focused in the absence of measures to diminish Union spending. One of the party’s senators, Alvaro Dias, spoke on the need for “administrative reform”.
The left wing opposition condemned the sacrifice imposed by the package to employees. Luciana Genro, Psol’s (Socialism and Freedom) candidate in the elections, said that “even Obama” defended enlarge taxes on the rich to relieve the poor.
The unions – almost all of them supported Dilma Rousseff in the runoff of 2014 elections – rejected the measures and marked mobilizations for the end of January and February. In a statement, they condemned the restriction of granting social security benefits.
‘The adjustment concept is the same in Europe and Latin America’
High profits for multinational and national corporations, low wages and cuts to public investment for the middle classes. This is the logic of fiscal adjustment in Brazil and austerity in Europe, in the opinion of Nildo Ouriques, Professor of Economics and International Relations at the Brazilian Federal University of Santa Catarina and President of Latin American Studies Institute. Speaking to the Brasil Observer, he says we are in a new phase: “It’s the end of illusions”.
Is there any difference between the “Fiscal Adjustment” in Brazil and the “Austerity” in Europe? Brazil is at risk of suffering the same consequences from European austerity?
The adjustment concept is the same in Europe and Latin America. This is basically a class war against the people, because this policy ensures super-profits for multinational and national companies, and low wages and investment cuts in health and education for the poor and the impoverished middle class.
Latin Americans have life, politics and economy controlled by financial policy since always; that’s why foreign debt – and the now the internal too – is always priority for governments (left or right). The European periphery is now learning a law that for us is almost bronze: over-exploitation of workers is the foundation of the political economy. This framework will enable Brazilians and Greeks (Italian and Spanish as well) to know that the struggle is international.
Is the fiscal adjustment policy in Brazil really inevitable? What is the origin of this imbalance and how to fix it?
In Brazil, as in the rest of Latin America and parts of Europe, the mainstream media have manufactured the public opinion in accordance with the interests of bankers. Thus, the majority accepted the “theory” that we are facing a fiscal crisis. Such a thing does not exist. What exists is a financial crisis of the state that was purposely indebted to then apply the fiscal adjustment.
Over the past four years Greece has received approximately 220 billion euros and paid 330. The debt, however, has not stopped growing. It is the debt automatism. The only way out is to conduct an audit as Ecuador did and simply cancel – because of the illegal nature of its contracts – most of the public debt that benefit almost exclusively bankers.
Has the unemployment rate decreased in Greece? No, it is rising up. So there is no fiscal adjustment that eliminates the financial crisis of the state. The cause of Greece is important for all of us in Latin America. In Brazil, President Dilma Rousseff had other options. But instead she promotes a pact of classes that favours primarily exporters, multinationals and especially bankers.
Last year, 44% of Brazil’s budget was allocated to the payment of interest on domestic and external debt. It’s very similar to a country at war, when half of the budget is for defence. Here, on the contrary, when they take 7 billion reais of education, the government says it is to generate revenues to “honour” the payment of debt, which does not diminish but grows. Of course, there are alternatives: tax increases for the rich, for exporters, etc. Soy exports are tax free. I paid 27.5% of my teacher’s salary, while mineral exporters paid up to 4%. Without a debt audit, no government can honour its election speech.
Do you believe that the rise of anti-austerity movements in Europe can boost similar movements in Brazil?
Yes of course. Here we have a long tradition of social movements. In Europe and the US, they are more or less recent because the majority of the population believe in the great mass parties. In Spain, the PSOE; in Greece, the POSOK; and in Italy, the Socialist and Communist parties. But the crisis has consumed their credibility, because every new election, after defending the workers and the people before the vote, they accepted the IMF program on the first day in office.
Their credibility is over and some parties disappeared. It was great. It’s the end of illusions. We are now living a phase of new parties. In Brazil, the PT (Workers Party) is very similar to the PSDB (Social Democrats) and the PMDB (Democratic Movement), both traditional parties. The PT was once a party of struggle and combat, but is currently the main party of the ruling class. In this sense we repeat the PCI tragedy in Italy and the PSOE in Spain. The people’s response has been quick and we wait to see if the Greek government maintains its firm position.
