Economics versus Politics: Who will win Brazil’s budget impasse?

RIO DE JANEIRO, BRAZIL – Bolsonaro has agreed to follow Economic Minister Guedes’ advice and partially veto this year’s budget bill to cut mandatory Social Security spending proposed by the legislature.

However, in line with legislators and his government’s political wing, Bolsonaro intends to keep resources for construction and funds earmarked by members of parliament. Therefore, the cut’s size will hardly be what the Ministry of Economic is defending, said four people with knowledge of the matter who requested anonymity because the discussions are not public.

Two people said the economic team defends re-establishing between R$20 (US$3.5) billion and R$30 billion in mandatory spending cuts. The problem is that balancing the budget at this amount means less money for earmarked funds that members of Congress assign to projects in their home districts. That is why Congress and political officials in the president’s office say that the amount advocated by Guedes must be lower.

Congress has been willing to accept a veto of around R$10 billion in earmarks. An aide to Guedes said the figure is still being negotiated and has to take into account both legal and political perspectives.

Read: Pandemic caused Brazil’s federal government costs to grow 16% in 2020

The minister has spent the past few weeks warning Bolsonaro that he could run into trouble with the Federal Audit Court (TCU) if he sanctions an artificial budget bill with potential accounting stratagems, similar to those that led to the impeachment of ex-president Dilma Rousseff.

The mandatory earmarked expenses would end up appearing throughout the year, and the only way to finance them would be to exclude them from the spending cap rule, which investors consider the last line of fiscal defense.

Concerns about additional government spending this year – beyond the R$44 billion in emergency aid to help those who lost income during the coronavirus crisis – have made investors nervous.

They fear that after spending nearly 14% of GDP to cushion the pandemic’s economic impact last year, Brazil has no credible plan to balance its budget, which could further weaken the currency, fuel inflation, and hurt the economic recovery.

Echoing these concerns, Central Bank President Roberto Campos Neto has warned twice in the past three days that uncertainties surrounding the Budget would lead investors to demand more yield to buy government bonds, potentially undermining monetary policy.

Political Reality

On the other side of the arena, however, are the president’s political advisors, who won’t let him forget that the 2021 Budget is what finances, on the government’s side, next year’s presidential elections.

The Budget episode is yet another chapter in the already frayed relationship between the president and his Economy Minister, people said. The internal assessment is that Bolsonaro and Guedes are becoming increasingly distant as the president needs to improve his popularity, hit hard by his controversial and often inadequate handling of the coronavirus pandemic.

At the same time, Bolsonaro also needs the centrist parties’ support, who also want more resources for investments in their electoral strongholds.

Mainly to please his allies in Congress, Bolsonaro sponsored last week’s ministerial reform to integrate the Centrão voting bloc into the government’s heart, appointing federal Deputy Flavia Arruda as minister of the Government Secretariat, a key position in negotiations with the legislature.

The new political command in the government wants to validate its power through the Budget and will not accept giving in entirely to the solutions defined by the Ministry of Economic, said two of the people.

State of Calamity?

The next chapter in the dispute between Guedes and Bolsonaro’s political team will use the calamity clause in 2021 to combat the pandemic.

The minister and the president of the Central Bank are against the concept. They have said that this mechanism, which was used last year to allow the government to exclude from the spending cap all the stimuli related to the coronavirus, would not be reasonable.

However, the issue is already under discussion for the second half of 2021 if vaccination does not accelerate and the pandemic does not show signs of receding.

Source: Moneytimes

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