Why Brazil’s economic reforms are unfair

Brasil Observer - Feb 07 2017
Brasília - O Presidente interino Michel Temer faz pronunciamento no Palácio do Planalto ( Marcelo Camargo/Agência Brasil)
President Michel Temer political agenda hasn’t passed through electoral scrutiny (Photo: Marcelo Camargo/Agência Brasil)

(Leia em Português)


It is necessary to resume economic growth as quickly as possible, but preserving social inclusion


By Júlio Miragaya

Brazil needs to resume economic growth as soon as possible, but not at any price. It’s essential to keep promoting social inclusion and advancing in the social and spatial distribution of income. We are 207 million inhabitants with deep social contrasts; despite some advances in the last decade, more than 35 million Brazilians remain in poverty. The reason for that is the enormous concentration of income and wealth in the hands of a minority.

According to an OXFAM study, the richest 1% of the population concentrates about 40% of the national wealth, while the poorest 50% hold about 3%. In this context, Brazil persists as one of the most inequitable countries in the world, but there is a smokescreen that hides one of the main mechanisms of concentration of income and wealth: our tax system, which is highly regressive, economically irrational and socially unfair.

It should be noted that in 1988, towards the end of the military dictatorship, the ruling class had to make a concession, albeit small, allowing a timid system of social security and public education, the same it is trying to destroy today. Although its limitations, it is this system that prevents us from having hordes of flagellates, looting of supermarkets and breaks in the peripheries of metropolises in the dimensions that occurred in the recent past, even with a sharp fall in GDP and high unemployment levels.

It’s impossible to meet the growing social demands without touching our archaic tax model. It is not a problem and it is not even true that our tax burden is high or has grown exaggerated during the Workers Party governments (2003 to 2016). From 1988 to 2002, it rose from 26% to 33%, but from 2003 to 2015, it remained strictly in this percentage, having fluctuated slightly to 35% in 2009.

The problem is that 72% of the tax burden resides on consumption (56%) and labour income (16%), with taxation on capital income and wealth representing only 28%, against the rest of the world. In the OECD countries average, for example, taxation on capital income represents 67% of total taxes collected, leaving only 33% on consumption and labour income.

However, instead of this debate, the discussion is directed towards a presumed and non-existent over expenditure of the public sector, in particular in relation to the expenses with education, health, welfare and assistance, which would be responsible for the increase of the public deficit, omitting the greater reason, which are the public debt interest expenses (accounting for 80% of the nominal deficit), excessive tax waivers, revenue frustration as a result of the crisis, low levels of combating tax evasion and corruption.

To rebalance the public accounts, a set of proposed actions will have negative effects on the poorest and the middle class. The spending ceiling, which established a freeze on public expenses, including health and education, will result in deep cuts in social spending, even if the current volume of resources is insufficient to offer the population a better quality service that fully meets demand.

In the health area, for example, we have a rapidly aging population, demanding increasing resources, and, according to the National Forum of State Secretaries of Health, the measure will reduce the resources of the sector in the next 20 years by 650 billion reais. The “New Fiscal Regime” places the burden of adjustment on the poorest sectors and causes reduction of social rights already won among those established in our Constitution.

The proposal for labour reform can also represent loss of rights for tens of millions of workers. The outsourcing bill, for example, will reverse the progress made in recent years in the formalization of labour relations. The prevalence of negotiations over legislations threatens the labour achievements of millions of workers, especially those of small professional categories, represented by unions with reduced ability to mobilize and negotiate.

Another setback comes with the proposed pension reform. Social security began to be instituted in Brazil in 1923, and it is unacceptable to seek to change so profoundly a system that has operated in the country for almost a century in a couple of months. In addition, it is unacceptable that changes in social security that will affect the lives of tens of millions of Brazilians will be done by a National Congress that is absolutely illegitimate, corrupt, elected by economic power and the most conservative since 1964.

The Michel Temer government proposal focuses exclusively on expenditure, neglecting revenues. The equation of social security financing should start with revenue. It should also be pointed out the conjectural nature of the fall in social security contributions, due to the sharp fall in the level of employment in 2015 and 2016. As soon as the economy resume its growth pace, with the recovery of formal jobs lost during the economic crisis, the revenues must grow again.

Another fallacy of the government proposal is that social security presents a huge deficit. What happens is that the government, purposely, omits that the Federal Constitution, in its art. 195, provided for a tripartite system, with employees, employers and the government contributing, which means there is actually a surplus. The government resorts to the false and terrorist discourse that social security reform is necessary and unavoidable and that, if it is not done soon, there will be no money to pay the benefits. Cynically, analysts recognize that it is unpopular (according to SPC Brazil survey, 73% are opposed) and, as such, should be done soon, by an unpopular government and in a non-electoral year.

The government’s proposal came even more draconian than expected. For the purpose of retirement, women have been equipped with men and rural workers to the urban population; it is proposed to unlink the minimum wage in several situations; the social security contribution is increased from 15 to 25 years and, most seriously, to 49 years of contribution to obtain the right to full benefit.

We are moving towards a social security reform that represents injustices, especially with the poorest of the population, when seeking to raise the minimum age for retirement to the level practiced in countries with a life expectancy well above Brazil. How can we suggest that the rural worker retires at age 65 if the life expectancy of this population in the North-Northeast is 63 years?

In short, the country needs to resume economic growth, but preserving the social inclusion of the last years and advancing the distribution of income. Experience of GDP growth with social exclusion we had in the early 1970s under the military dictatorship, with the withdrawal of rights, political repression and a brutal concentration of income. This is certainly not the wish of our people.


  • Julio Miragaya is president of Brazil’s Federal Council of Economy (Cofecon)