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Brazil: Touching the Wound

In the midst of the greatest fiscal and unemployment crises in the country’s history, Brazil’s federal government, apprehensive about pressure from special interest groups, promised salary increases to civil servants, mainly those at the top echelons. This is perhaps the principal error of Temer’s economic policy.

Jul 28, 2017 // 8:46AM

With inflation declining there will be a substantial increase in earnings in real terms. And as if this were not enough, other demands for salary parity can arise, including from state and municipal employees.

Based on the growing obligatory expenditures and weak revenues, emergency measures are necessary until further structural reforms are approved. The recommendation is to revise the salary increases agreed with civil servants. Without this, in 2018 alone, the federal payroll will increase by BRL22bn.

There are two main arguments. First, the positive side. The data indicate that no inflationary corrosion of public sector earnings has occurred for several years. Besides this, the earnings of civil servants are higher than in the private sector and the number of government employees has grown substantially, at a higher rate than the broader population’s growth.

The RAIS data – despite its limitations and inclusion of CLTs (9.3% of the total) – permits comparisons: the average income in the public sector increased by 9.4% per year between 2003-2015, with the figure for federal employees being 9.3%, for state workers 10.6% and for municipal employees 10.1%. In turn, average earnings in the private sector increased by 8.3% a year in the same period, during which average inflation was 6.3%.

According to a study conducted by IPEA in 2009, a significant disparity exists between the average income of public-sector employees and workers in the private sector, without counting the additional benefits, the so-called “trinkets”. At the federal level, where the disparity is the largest, the average income of employees is practically twice that of a comparable worker in the private sector, considering the educational levels. The greatest discrepancy is between those with high school diplomas (2.2 times higher).

Worse still, the increase in the number of public workers in the period was substantial: 30% at the federal level, 10% for state workers and a whopping 76% for municipal employees. The proportion of civil servants in the total population rose from 3.9% in 2002 to 4.8% in 2015. The question is not the normative level, but the growth.

Disparity also exists between the branches of government. At the federal level, the increase in the number of employees of the executive branch was 10%, while for the legislative it was 55% and for the judiciary 50%. It is evident that fiscal discipline is not a theme for employees of the legislative and judicial branches. Historically, fiscal adjustments have always fallen most heavily on the executive branch.

A recent example of this was the decision of the Superior Board of the Federal Prosecution Service to increase the salary of career civil servants by 16.7%, after an adjustment of 12% approved last year by Temer.

The second argument is normative in nature. Revising agreements for salary increases of civil servants can be the best decision at the moment. Certainly, there will be counter-reactions to the change in what was agreed. But the benefits might well exceed the cost, particularly if the decision is well communicated to society.

The placement of budget allocations on contingency compromises the quality and supply of public services, to the detriment of society, making it necessary to contain obligatory spending, starting with the categories that are easiest to limit and most advisable from the standpoint of society.

One cannot lose sight of the fact that the private sector routinely faces changes in rules, without criteria, hampering the work of decision-makers, not to mention the difficulties faced during recessive cycles and unemployment caused by poor conduction of fiscal policy, as in the present case.

 The agenda for downsizing the public sector needs to be faced, not only because of the emergency of the moment, but also to correct injustices and severe distortions.

International evidence shows that competitive salaries and job stability do not have a significant impact on corruption. What matters are meritocracy, transparency and good governance in the public service.

Americas Macro Policy & Government Latin America

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