Brazil: Reckoning with public debt and reshuffling responsibilities

The golden rule of the public accounts establishes that the federal government can only issue debt for investment and refinancing of the existing debt, not to pay current expenses. It is a good constitutional rule, because it forbids one generation from creating debts resting on future generations to pay for a profligate state.

However, the rule needs some adjustments. It does not contain mechanisms for course correction when violated and has not managed to be an instrument to induce the fiscal adjustment necessary for its satisfaction.

Despite increased transparency of the public accounts under the Temer administration, the size of the crisis and the importance of the golden rule are not sufficiently clear to the political class, the judiciary and society as a whole.

Failing to comply with the golden rule poses a threat to the presidential mandate, because this would depend on congressional authorization to take on additional debt. An additional complication looms for 2019, because if things continue as they are now, the rule will be impossible to satisfy due to the large and growing obligatory expenditures, such as by the social security system. Needless to say, the executive branch cannot send a budget bill to Congress for 2019 that violates the law.

The need for adjustment in the budget is on the order of a whopping BRL200bn, which perhaps will only be achieved in several years. In this interim, some loosening of the golden rule might be necessary to avoid a shutdown of public services.

Allowing the situation to reach this point was a grave error of the country. Reforms were irresponsible delayed and control bodies were lax in their oversight.

Making the rule more flexible without any counterpart measures must be avoided at all cost. This would set a dangerous precedent. Furthermore, we cannot increase an already sprawling bill for future generations to pay.

Any relaxation should be conditional on a plan to control expenses, as intended by the government. It has aired the possibility of freezing the pay of civil servants and opened the possibility set forth in the Constitution of reducing the working life and salaries of public employees. Besides this, the three branches and independent bodies, such as the Public Attorney’s Office and Public Defender’s Office, need to be subjected to the counterparts. The cost of the adjustment cannot fall only on the executive branch.

Time limits and prohibition of more relaxation in the future need to be established to avoid generating leniency with the fiscal crisis, much less authorization to make more concessions to special interest groups.

It would also be important to reinforce the incentives from the golden rule for execution of the fiscal adjustment. The proposal of this article is to extend the responsibility for compliance with the golden rule to the heads of the judicial and legislative branches, not only the executive.

In the current design, not only do these two branches not have any incentive to contribute to the fiscal adjustment – both have often created obligations for the federal government, which is solely responsible for failing to comply with the constitutional rule.

The branches have made decisions without considering the fiscal implications. This is a mistake. Decisions by the judiciary have hampered the fiscal adjustment, such as the injunction issued by Justice Ricardo Lewandowski of the Supreme Court suspending the delay of the pay raise of civil servants and increase of their social security contribution, and the injunction issued by Justice Luiz Fux authorizing housing support for judges. Further burdens have been placed on the federal government, such as injunctions issued in 2016 in favor of state governments that questioned the calculation of their debts.

In Congress, the tendency is to exploit the president’s fragility. The presidential mandate will be threatened if Congress does not approve the necessary reforms to achieve fiscal balance.

The responsibility of complying with the golden rule needs to be shared, creating incentives for fiscally responsible stances of all branches and levels of government. If this were the case, the pension reform might have been approved already. The current model weakens the public accounts and democracy.

Americas Macro Policy & Government Brazil Latin America

Zeina Latif is chief economist at XP Investments. She holds master and doctorate degrees in Economics at University of Sao Paulo (USP).

Previously she worked at Royal Bank of Scotland as senior economist for Latin America, and ING, ABN Amro and HSBC Asset as chief economist for Brazil.

She is columnist at the newspaper Estado de São Paulo and she is counselor at the Social and Economic Development Council of the Republic Presidency.

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