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Blogs, Crisis response (stimulus and austerity measures), Macroeconomic policies

Brazil: Fiscal adjustment winds reach social rights, but not financial interests

Since early 2000s decade, Brazil has been experiencing changes and making progress towards the promotion of social inclusion and poverty reduction, in line with the requirements of progressive realization of economic and social rights. The country knew how to profit from the international economy’s favorable moment. The increase in international prices of Brazilian products was motivated, to a certain extent, by China’s growth. China’s demand for commodities – inputs for its industry (automotive, metallurgical, etc.) in addition to civil construction and food products – boosted Brazilian exports focused on those goods.

Brazil, helped by this positive context, invested in promoting social policies regarding health, housing and food through governmental programs. Examples of these programs are Mais Médicos (More Doctors, to bring physicians to regions where there is shortage of doctors, and to increase investments for construction, renovation and expansion of healthcare centers, among other things), Minha Casa Minha Vida (My House My Life, to facilitate housing funding for low-income families in rural areas and in the city), and Bolsa Família (Family Allowance, to reduce hunger and poverty and to aid families in poverty and extreme poverty access fundamental social rights such as health, food, education and social welfare). The said programs are part of a number of actions to stimulate the economy and intensify the country’s social protection system.

However, beginning with the international financial crisis in 2008, noticeably lower growth worldwide had  an impact on global trade, reducing the demand for commodities and culminating with a slump in international prices during the last years. Despite the great importance those goods had in the Brazilian exports basket and the troubles caused by the crisis, some Brazilian indicators, such as rate of unemployment and of gross public debt (as a fraction of GDP), remained good as compared with other countries until 2014. This was mainly due to countercyclical policies adopted by the Brazilian government during that period. Nonetheless, the nominal public deficit, which remained below average as compared with developed countries between 2009 and 2013, increased in 2014. This increase was a result of, among others, a payroll tax reduction policy, which was at first granted to some least competitive industries and then extended by the government (unrequited), causing a tax expenditure of billions of dollars. Additionally, there are heavy expenditures related to an interests rate hike that increases interest payments on government securities and to a slump in tax collection, as a consequence of low economic growth.

In May 2015, the government announced a budget cut of USD 18.9 billion aiming to balance out the country’s public accounts and to reach primary surplus (initially of 1.2 per cent of GDP) which, in theory, would curb the rising path of the debt “putting the country back on track.” This expenditure reduction is part of a number of actions of the Fiscal Adjustment, which aims to unlock the economy but actually affects social areas directly, posing a risk to the improvements achieved in the last decade. As an example, the Ministry of Cities, Health and Education alone received 54.9 per cent of the cut announced in the beginning of the year. Besides, many measures have been taken which represent a real setback in the Brazilian social protection system, such as hardening access to some labor rights like unemployment insurance, special salary raises or unemployment benefits for artisanal fishermen, along with access to death and sickness benefits regarding social security. Following the same line of reduction, many ministries and secretariat offices were closed (or merged) going from 39 to 31 ministries. This cut clearly shows how some areas concerned with social issues, like the Solidarity Economy Secretariat, lost ground. Therefore, although the social programs Mais Médicos, Bolsa Família and Minha Casa Minha Vida are being maintained, the budget cut and all the changes occurred in this fiscal adjustment reveal a turning of backs on the historical struggle for poverty reduction and social policies implemented by the last governments.

Public banks, used by the government as a tool for these policies and for stimulating several activities during the last years, will have their roles re-defined. The Caixa Econômica Federal has already changed its regulation for home loans of existing real estates: they demand 50 per cent downpayment, which will make the buyer pay higher interest rates with other banks that still apply the 20 per cent down payment rule, and consequently, the private financial sector will increase its profit. Besides, the Federal Government restricted to USD 13.5 billion its transfers to BNDES by the Provisional Measure Nº 663, altering the 2009 Act which had enabled transfers to BNDES as a measure to mitigate the international crisis effects (in those days, the transfers reached USD 24.3 billion in a single year).

Since then, we are witnessing a slump in public and private investments (7.8 per cent less compared to the first quarter of 2014), an important increase of unemployment rate (according to PNAD Continua – a national research by the Brazilian Institute of Geography and Statistics IBGE – the unemployment rate reached 8.3 per cent in the second quarter of 2015) and a reduction of formal employment (730 thousand job positions have been closed in 2015). And to make things worse, the adjustment proved to be ineffective for its own objectives – government’s surplus – since it considerably reduced tax collection despite the expenditure reductions (last forecasts say deficit can reach USD 29.7 billion in 2015).

Thus, adjustment and reduction policies reveal a bias towards favoring richer classes, as they promote the interests of the financial system and those owning financial assets. But the ones to suffer their disastrous consequences are low-income people in need of an active and strong state able to decommodify fundamental rights and promote them through social policies. It is important to highlight that in the way this adjustment is being implemented, the major cause of the state’s instability and indebtedness, financial expenses related to the debt interest rate, is not really addressed. On the contrary, the Brazilian Central Bank keeps rising the benchmark interest rate — which determines the interest rate on government securities — increasing the interest burden on government securities and, thus, the size of governments’ payments, and posing obstacles to its own adjustment. In this regard and as a result of the association between the conservative philosophy and the mass media, there is a defined aim: to favor financial profits at the expense of other expenditures of the budget. The suffering caused by this model has already started.

It is worth remembering that austerity measures like the ones being implemented in Brazil are not successful since they end up reducing the income of the ones who need it the most, they weaken the internal market consumption and reduce tax collection, causing a downward spiral as happened in the countries of the European periphery recently. The Fiscal Adjustment should (and must) prioritize taxes on the wealthy or on inheritance and reducing tax evasion, among others measures, instead of putting arbitrary reductions on the back of the most vulnerable groups. If those resources were allotted for social security, government social policies would be guaranteed to continue.

Another important point is the exemptions and benefits of the business sector: it is estimated that USD 67.5 billion were not collected in 2014 due to tax and contribution exemptions. Nowadays in Brazil, companies of different sectors receive benefits that impact directly on tax collection regarding social areas (such as health, social security and social welfare), which means less resources to spend in social policies for the population. This is particularly true regarding social insurance contribution – such as Social Integration Program (PIS) and Contribution for the Financing of Social Security (Cofins) –, due to the fact that these contributions are intended only for financing social areas. Therefore, it is necessary to re-consider those exemptions urgently. Under such circumstances, in which unemployment increases month by month and formal job positions are not being created due to the economy’s weakness (and economic activity that is, consequently,even weaker), it is essential to think of solutions to make “the wealthy, the millionaires and the financial system” contribute to getting back in the growing path. Necessarily for this purpose, a tax reform should be adopted to create a more progressive structure where the ones that earn more pay, proportionately, more.

Finally, a threat to rights it is important to highlight is that this fiscal adjustment is happening in a context where the Brazilian conservative right wing is advancing. This is clearly seen in the way the Senate and the Chamber of Deputies are formed: they are mainly organized around an agenda that apparently wants to recover “family, tradition and property” values, shaping the “most conservative parliament since 1964.”


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January 2017
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