Brazil faces budget disaster, says speaker

Posted on October 21, 2016

Brazil’s economy could face disaster if congress does not pass important reforms to cap budget spending and stop a blowout in its pension bill, according to the powerful speaker of the lower house, Rodrigo Maia. 

Without the reforms, which are the keystone policies of the new government of President Michel Temer, Brazil could return to the dark days of the late 1980s and early 1990s when inflation averaged 1,400 per cent a year. 

“It’s not a joke what’s happening in Brazil,” Mr Maia said in an interview. “The crisis is real. It’s already hit the majority of municipalities, the majority of states, and if these reforms aren’t approved it will hit the federal government too.” 

The warning comes as the government led by Mr Temer’s centrist Brazilian Democratic Movement party, or PMDB, is trying to restore Brazil’s sinking public finances, with the budget deficit running at about 10 per cent of gross domestic product. 

The economy is facing its worst recession in over a century, with GDP expected to decline about 7 per cent in two years and leave 12m people unemployed. 

To make matters more uncertain, Mr Temer’s PMDB is under scrutiny from investigators probing a giant scandal at Petrobras, with the party’s former house speaker, Eduardo Cunha, under arrest and expected to enter into a plea bargain with prosecutors. 

Mr Temer, the former vice-president, came to power after his predecessor and running mate, former president Dilma Rousseff of the leftist Workers’ party, was impeached in August for manipulating the state budget. 

Speaking from Brasilía’s modernist Palácio Planalto, the presidential palace, where he was serving as acting president this week while Mr Temer was abroad, Mr Maia said the first stage of the reforms — a proposal to limit real increases in government spending to zero for up to 20 years — was likely to pass congress this year. 

The first vote held last week was passed by congress with an overwhelming majority of 366 votes to 111 in the 513-seat lower house. The proposal will be subject to more votes in the lower house and the senate. 

He said the bill was necessary to rein in a steady increase in the size of the Brazilian state. Spending by federal government alone had nearly doubled from 10 per cent in the 1990s. Brazil’s overall government, including federal, state and municipal levels, now spends the equivalent of a developed nation without providing the requisite services, analysts say. 

If public spending was not controlled, Brazil could revert to the period of hyperinflation before 1994 when it introduced the “Real Plan” — a new economic model that emphasised curbing untrammelled fiscal and monetary expansion. 

“The state has to live within its means,” Mr Maia said. 

He pointed to the example of Rio de Janeiro, his home state, whose government was already broke and unable to meet pension commitments. 

But while the spending limit was expected to attract less opposition from voters because it was more abstract, the pension reform was likely to be more difficult. 

Brazilians currently can retire on full benefits after 30 years of work for women and 35 years for men. Mr Temer’s proposal is likely to try to set a minimum retirement age closer to international norms in the mid-60s when it is presented to congress in the coming weeks. It will probably be voted on in the first half of next year. 

Without this reform, the federal pension bill alone is expected to rise from over 9 per cent of GDP to 19.5 per cent in 2040 as the population ages, according to budget analyst Raul Velloso. 

Aloysio Nunes, the government’s leader in the senate, said Brasília was gearing up for a bigger battle over the pension reform. 

“When you talk about reforming the pension system, every citizen will think about what might be the repercussions for him,” Mr Nunes said in an interview. “These reforms are difficult to implement in any country … For that reason, we will need to wage a grand battle to win over public opinion and show that the system that exists no longer works.”

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