The economy is hostage to austerity

brasilobserver - Aug 17 2015
Ministers of Planning, Nelson Barbosa, and Finance, Joaquim Levy, before talking to reduce the primary surplus target (Photo: Marcello Casal Jr/Agência Brasil)

(Leia em Português)

Brazilian government falls into the trap it created: recession caused by the austerity measures prevents that the goals of this same austerity from being met


By Wagner de Alcantara Aragao

The second semester begins in Brazil with the federal government making changes in its macroeconomic policy, which must therefore bring more impacts to the real economy and public services offered to the population. The fiscal adjustment implemented since the beginning of the year caused side effects that did crumble the very raison d’être of monetary tightening, which is the search for a primary surplus that would leave the country well regarded in the international financial markets. The ministers of Finance, Joaquim Levy, and Planning, Nelson Barbosa, announced the changes on 22 July 22, which is being called “the adjustment of the adjustment”

The changes were seen by analysts who are critics of the austerity path taken by President Dilma Rousseff in the second term as a retreat and at the same, a sign of some disorientation of the economic team. That’s the evaluation, for example, of the Professor Pedro Henrique Evangelista Duarte, Doctor of Economic Development and Lecturer at the Federal University of Goias (UFG). “What we have is a schizophrenic economic policy,” said the professor to Brasil Observer. “A policy aimed at a particular class, the investors, who do not give ‘response’ to any government measure, given that the expected results – the return of private investment – remains low”.



The most substantial decline announced by Levy and Barbosa ministers was the reduction in the primary surplus target for 2015. The target set in January was R$ 66.3 billion, equivalent to 1.1% of Gross Domestic Product (GDP). Now, the economic team lowered that target to R$ 8.75 billion – or 0.15% of GDP. Primary surplus is the amount the government saves for the payment of public debt. The primary surplus target includes savings for the Union (federal government), state companies, states and municipalities.

And why is that goal being reduced? Because of the sequels of the fiscal adjustment itself. A monetary policy based on austerity makes the economy retracts. For the government to reach a surplus, it must cut spending and investments. Thus, fewer public funds are intended for public works and services, for the lines of credit that finance the purchase of real estate, for the purchase of equipment for the industry, or to other forms of consumption by households. With less money circulating, the wheel of the economy stops spinning.

When the economy stops growing, the tax collection is also impaired. If less money enters, it becomes harder for the government to save. And that is precisely what happened in the first half of this year. Even with the government having cut R$ 69 billion of the 2015 budget, achieve the initial goal of primary surplus became impossible. “This whole process is a result of the government’s confusion about what exactly needed to be done,” said Professor Duarte.



After Levy and Barbosa’s announcement, the Ministry of Finance and the Central Bank confirmed that achieve that primary surplus became unfeasible. In the first half of the year, the consolidated public sector (federal, state, municipal governments and state companies) managed a surplus of R$ 16.2 billion. The amount, however, is lower than the R$ 29.4 billion from the same period in 2014. In 12 months to June 2015, the result is a primary deficit: R$ 45.7 billion.

When analysing the performance of the federal government (National Treasury, Social Security and Central Bank), the balance was also deficit in the first half: R$ 1.9 billion. For the federal, state and local state-owned enterprises (excluding Petrobras and Eletrobras) the primary deficit was R$ 1.159 billion. The primary surplus of the consolidated public sector was only achieved thanks to the positive balance obtained by state governments (R$ 16.426 billion in the first half) and municipalities (R$ 2.868 billion), according to Central Bank.

But the Ministry of Finance report noted a primary deficit in the accounts of the Federal Government of R$ 1.6 billion in the first half of this year. In real terms, after adjusted for inflation, the result is the worst for the first six months of the year since the inception of the series in 1997. The problem was no increase in government spending – virtually the same level (it grew by 0.5%). Total revenue (tax revenue, fees and contributions), however, fell 3.5%.



For government spending does not grow, the budget cuts represented crucial reductions in important works and investments for the country. The investments of the Growth Acceleration Program (PAC), for example, decreased by 36%, amounting to less than R$ 20 billion. The PAC, as it is known, is a set of works (roads, railways, ports, airports, electricity, sanitation, urban mobility) essential to provide the country with infrastructure necessary to economically expand and develop socially. There were also cuts of the civil service (1.3%), reflecting flattening salary of civil servants and stagnation of the payroll – by extension, it damages the quality of services.

Besides all the negative consequences – stagnation or recession of the economy, scrapping of public services, brake on infrastructure projects and other investments – fiscal adjustment has cost politically to President Dilma Rousseff. The monetary tightening was the opposition candidacy government program. Dilma managed to down the stretch of last year’s election with decisive support exactly for representing an obstacle to the threat of austerity. There is a widespread sense of betrayal of campaign promises. The current unpopularity of the president owes much to the economic recession, and this has been worsened by the very fiscal adjustment.



Dilma and her economic team defend the fiscal adjustment arguing that Brazil cannot lose credibility in the international markets. Confidence in the country would be maintained if investors realize the effort to keep public accounts in order. Such confidence would be essential so that investors continue to bet their chips in Brazil, investing in works of Logistics Infrastructure Program (PIL), for instance, designed on the model of public-private partnerships.

Attracting investors that are secure about the fiscal robustness of Brazil, the national economy would overcome the “transitory” difficulties, as the president has said, and resume the path of growth. The adjustment would therefore be a clear government signal to the market that unconditional willingness to ensure surplus to pay the public debt. The reduction of the primary surplus target would not mean a fiscal loosening, just an adaptation to real values.



For Professor Pedro Henrique Evangelista Duarte, there is a situation of diagnostic error by Dilma’s government, which seems to understand the current scenario similar to 2003, when Luiz Inacio Lula da Silva was first elected. As by then Lula could represent, in the eyes of the market, a “threat”, fiscal austerity was seen as a necessary evil, as the remedy to ensure political and economic stability, and then the very governance. It worked at the time.

Now, after an extremely polarized election, with narrow victory of Dilma, it was decided to do a fiscal adjustment as a way to calm the market mood and reverse political instability. It did not work. The tightening brought recession, dissatisfaction at the base of the president and thus become an even more fragile government.

“There is a belief that the current scenario is similar to 2003, and that a recessive adjustment policy could organize the way for years to come. We have a very different scenario, especially if we look at what is happening with the world economy. For example, China, an important partner of Brazil, has shown decline in their growth, and this has a significant impact in the context of the external economy. Not to mention the crisis in Europe, which also has internal reflections,” argued Professor Duarte.



Only concrete success so far, the fiscal adjustment could prevent Brazil had its investment grade lowered by the rating agencies. The Standard & Poor’s, in its latest statement on 28 July, continued to keep the country classified as safe for investors. There was a policy of significant correction during the second term of President Dilma Rousseff, says the agency, pointing out that Brazil is facing challenging political and economic circumstances.

The difficulty for the government to approve the fiscal adjustment measures in Congress; the approval, by the same Congress, of projects that impact the costs of the Union (such as applying the same minimum wage adjustment index to retirement); and corruption scandals involving politicians from different parties and large companies and entrepreneurs have made the agency, on the other hand, review for “negative” the outlook for future ratings.



Although the credibility of these rating agencies are questionable – they essentially represent the interests of the financial market, and not properly investors in the productive sector – the Brazilian government, politics and national media still take a lot into account of their ratings. The signs of these agencies are widely reflected in newscasts, websites and commentators of the major radio networks, fitting to the alarmist discourse of major media outlets.

For at least three years, even if often belied by the facts, the media sings the word “crisis” almost like a mantra. It rarely makes an inference with other periods of difficulty, comparisons with the external environment in order to contextualize and transmit the real scale of the problem. A recent text by cinema critics Pablo Villaça went viral just by throwing open the discrepancy between the facts and the versions of the facts. The text opposed the “discouraging” tone of the news to the satisfactory results of investments from large companies, domestic and foreign, that link Brazil as a good investment destination, despite the turbulent situation.

“I’m really impressed how political columnists of the mainstream media take pleasure in painting the country in sombre colours (…) one thing is to say that the country is in wonderful condition, because it is not; another is to invent a chaos that does not correspond to reality. The truth, as usual, lies in the middle: the country faces serious problems, but is far from living ‘in crisis’. It would be easier to avoid it if the media did not insist on sow panic in the population – which, then, yes, has the potential to cause a real crisis,” he wrote.



It is true also that the government itself, to choose the path of the recessive fiscal adjustment contributes to thicken the media chorus and become the fertile ground where it forges a scorched earth scenario. On the one hand the economic team decided to lower the surplus target, will not save the budget further cuts. Until the time of writing, the Treasury confirmed an R$ 8.6 billion block.

More than half (55%) would be PAC resources (R$ 4.66 billion). The scissors would spare no ministry, according to the Secretary of the Treasury, Marcelo Saintive. “All ministries will be affected with cuts, but we will preserve priority areas in the ministries of education and health,” he pondered. With this lock of R$ 8.6 billion, the cuts in the 2015 budget reached R$ 78.5 billion – in May, R$ 69.9 billion had already been removed.

Not only that, the Monetary Policy Committee decided in July rise for the seventh time in a row the basic interest rate of the economy (Selic), which rose from 13.75% to 14.25% per annum, one of the highest of the world. The raising makes more expensive the credit, both for the productive sector as for consumption, establishing itself as one more element to constrain economic growth. Unions and industry representatives strongly criticized the new addition.

The need to control inflation is the justification given by the Monetary Policy Committee to promote high Selic. The high interest rates also attract investors in the financial market, says the committee. For Professor Duarte, the focus of the current economic policy is what is wrong. “While the government cares about [back economic policy for] investors who no one knows where they are, the population has suffered the effects. I think what is missing is the government reorient economic policy for the care of the population.”




Gross Domestic Product

January-March 2015: R$ 1.4 trillion (-1.6%)


Retail Sales

January-May 2015: +4.1% (nominal revenue); -2.0% (sales volume)



January-May 2015: +2.3% (nominal revenue)


Industrial production

January-May 2015: -6.9%



6.9% (June 2015)


*Variation compared to the same period last year | Source: IBGE