O Insurgente: Brasil: Os efeitos das políticas "tax and spend"

AFTER two years as Brazil's finance minister, Antonio Palocci must feel like saying “I told you so.” Critics had said that tight fiscal policy, coupled at first with high interest rates, would cripple the economy. Instead, this combination first smacked down inflation in 2003 and then delivered economic growth of 5.2% last year, the fastest pace in a decade. Mr Palocci convinced creditors that Brazil would pay its colossal public debt. That promise, plus an export boom, triggered a dramatic fall in risk premiums on Brazilian bonds and helped domestic interest rates to decline. Now Brazil has the luxury of deciding whether or not to renew an accord with the IMF which expires this month.

But success has presented Mr Palocci with new problems and a new set of critics. Inflation is again a worry, real interest rates—already among the world's highest—are again on the rise and Brazil's currency, the real, has strengthened to the point where it may undermine exports. The criticism is that budget policy is doing too little to restrain demand and inflation, which means that interest rates are higher than they need to be. It is “a bad policy mix”, says Eliana Cardoso, an economic pundit. This time, the critics have a point.

This is ironic. Mr Palocci started out by tightening fiscal policy even more than the IMF wanted, setting the target for the public sector's primary surplus (ie, before interest payments) at 4¼% of GDP. Last year, the government beat the target, with a primary surplus of 4.6%. But the headline number hides two problems. First, it was achieved not by streamlining government but by harvesting the extra revenue that comes with growth. The tax burden has reached an intolerable 37% of GDP. Second, the government missed an opportunity to tighten policy even further while growth was strong. Brazil needs “a much higher primary surplus”, says Paulo Leme of Goldman Sachs, an investment bank.

The fault lies with Mr Palocci's boss, President Luiz Inácio Lula da Silva, who has responded better to crisis than to opportunity. Non-financial spending by the federal government rose by 11% in real terms last year, with big rises in areas that do nothing to strengthen long-term growth prospects. Lula added workers to the federal payroll, one reason why spending on personnel rose by 5% last year. Keeping an old promise, he will raise the official minimum wage by 8% to 300 reais ($115) a month, which will push up the cost of publicly financed pensions and benefits by 4 billion reais a year, says Raul Velloso, a budget expert in Brasília.

EconomistAFTER two years as Brazil's finance minister, Antonio Palocci must feel like saying “I told you so.” Critics had said that tight fiscal policy, coupled at first with high interest rates, would cripple the economy. Instead, this combination first smacked down inflation in 2003 and then delivered economic growth of 5.2% last year, the fastest pace in a decade. Mr Palocci convinced creditors that Brazil would pay its colossal public debt. That promise, plus an export boom, triggered a dramatic fall in risk premiums on Brazilian bonds and helped domestic interest rates to decline. Now Brazil has the luxury of deciding whether or not to renew an accord with the IMF which expires this month.

But success has presented Mr Palocci with new problems and a new set of critics. Inflation is again a worry, real interest rates—already among the world's highest—are again on the rise and Brazil's currency, the real, has strengthened to the point where it may undermine exports. The criticism is that budget policy is doing too little to restrain demand and inflation, which means that interest rates are higher than they need to be. It is “a bad policy mix”, says Eliana Cardoso, an economic pundit. This time, the critics have a point.

This is ironic. Mr Palocci started out by tightening fiscal policy even more than the IMF wanted, setting the target for the public sector's primary surplus (ie, before interest payments) at 4¼% of GDP. Last year, the government beat the target, with a primary surplus of 4.6%. But the headline number hides two problems. First, it was achieved not by streamlining government but by harvesting the extra revenue that comes with growth. The tax burden has reached an intolerable 37% of GDP. Second, the government missed an opportunity to tighten policy even further while growth was strong. Brazil needs “a much higher primary surplus”, says Paulo Leme of Goldman Sachs, an investment bank.

The fault lies with Mr Palocci's boss, President Luiz Inácio Lula da Silva, who has responded better to crisis than to opportunity. Non-financial spending by the federal government rose by 11% in real terms last year, with big rises in areas that do nothing to strengthen long-term growth prospects. Lula added workers to the federal payroll, one reason why spending on personnel rose by 5% last year. Keeping an old promise, he will raise the official minimum wage by 8% to 300 reais ($115) a month, which will push up the cost of publicly financed pensions and benefits by 4 billion reais a year, says Raul Velloso, a budget expert in Brasília.

O Insurgente

7.3.05

Brasil: Os efeitos das políticas "tax and spend"

Em destaque

Colunas

Entradas anteriores

Insurgentes