The final result of the Gross Domestic Product that will be released by IBGE this Wednesday (3), should confirm a fall of at least 4% in Brazilian productivity. Without emergency aid, this fall would be even greater – at least twice as much, according to this study by USP. At the same time, the prospects for advancing the liberal agenda of the Bolsonaro government, led by the now former super-minister Paulo Guedes, are being undermined every day by the old populist practices of the political universe of Brasília.
For the economist Paulo Pereira Miguel, partner and investment director at the Julius Baer Family Office, since the approval of the spending ceiling in 2018, the discussions that should be on the table, such as tax reform and various spending cuts, did not happen – at least not at the speed necessary to ensure the efficiency of the ceiling. Miguel, however, disagrees with his colleagues who advocate a review of the current tax regime in the short term
“It doesn’t seem to me that there is an imminent need to fix the ceiling right now. The right thing to do is make some tough choices and leave it to revise the ceiling in 2026, as scheduled,” explained the economist in an interview with EXAM. “And, in fact, if we have good triggers, hitting the roof can even be positive, because it triggers the triggers. We need that to have an adjustment.”
Miguel defends the processing of PEC 45 as the country’s top priority at the moment, leaving a deeper discussion about the Brazilian tax regime for at least 2022 – and sees the exemptions as an important source of funds for the federal budget. This plan, however, comes up against the culture of prioritizing sectorial agendas to the detriment of collective ones. And, mainly, in the lack of leadership in the country.
Read the full interview below:
EXAMINATION: Apparently, emergency aid will be extended outside the spending ceiling. How does the market evaluate this “scoop”?
Paulo Pereira Miguel: Last year, the great fear was that a permanent program would be created, spending R $ 20 or R $ 30 billion more per year. The discussion is now different. If it has to be extra ceiling, it will be temporary and contained. Something around R $ 200 reais, for three months, which gives less than 0.3% of GDP – whereas before it was talked about 1% or more. Therefore, I do not think there is a rhetorical break in the ceiling, but an exceptionality of the second wave that, if it is contained and involves a commitment to reinforce the ceiling in the medium term, will be palatable for the agents involved.
Some economists argue for increased social spending during the pandemic, including from a review of the spending ceiling. What is your opinion about this?
I strongly disagree with the overhaul of the ceiling. I see many kicks, saying that the ceiling prevents doing this or that, but in fact, it prevents our debt from exploding. The ceiling may not be the best rule, I even think that it should be improved over time, but it is necessary to establish fiscal criteria that are credible and indicate a path of solvency in the medium term. Shall we abandon the ceiling to put what in its place? The fact is that we have a growing indebtedness, one of the largest among the emerging ones, and fiscal rules that in the medium term do not suggest solvency. The ceiling is the only long-term reference we have in this regard.
Was the ceiling insufficient to settle public accounts?
A collection of elements that caused the ceiling to be insufficient. For it to work well, we would have had to have a faster control of mandatory expenses, which was missing. We could also have pursued more on the revenue side. There was shyness in the exemptions. We could have worked on a tax reform that would reduce indirect taxation, in income tax, in dividends … This could have been sought and it was not. The economy also ended up growing less. My opinion is that we have to reinforce fiscal discipline, but I do not see this discussion in view.
But she should be at the table, right?
It is reckless to embark on a comprehensive review of rules now, without clarity about what the economic team wants, about how the base at the congress is … Given the fragility of our situation, it is best to do what is necessary to play the fiscal uncertainty to 22, so that we can discuss this more calmly and accurately. My impression, which is very realistic, is that we must move towards strengthening the ceiling. A fiscal reform there, a reasonable administrative reform, and a more serious and broad fiscal adjustment, which involves changing the primary surplus trajectory by 3-4 pp of GDP, in addition to cutting expenses. And also on the revenue side.
Given the political environment that is taking shape, will we have the best of discussions when we leave it for 2022? Why not now?
I don’t think there is an imminent need to fix the ceiling right now. The right thing to do is make some tough choices and leave it to revise the ceiling in 2026, as scheduled. We will have a slightly tight 2021, but in 22 we will have a strong correction, because the accumulated inflation in the 12 months up to June / 21, which will guide the spending of 22, should close at around 6%. It is a significant increase in expenses. And, in fact, if we have good triggers, hitting the ceiling, if it happens, is even positive, because it triggers the triggers. We need this to have an adjustment.
Hitting the ceiling is generally seen as a nightmare. Can you explain your point better?
The issue is to regulate well. Given the size of our mandatory expenses, deindexing them for a year or two already opens up a good space in the budget. Today, overhauling the ceiling is absolutely light. If we hit the ceiling and, instead of firing the triggers, we review it, the ceiling is useless. Hitting the ceiling looks like a situation that reveals an inconsistency that requires it to be overhauled. I say the opposite. Hitting the ceiling with good triggers is even good.
With the budget so tight, is there still room for further cuts?
We have not yet cut anything except investments, because that is what we can do without political choices in the congress. There were no cuts in anything else. We cut little, and only where we couldn’t cut, which is the investment, because it is the piece of least resistance. But there’s a lot of room for cutting expenses, and we haven’t even looked at that yet. The first place we should have the courage to work on is to reduce exemptions. Until 10 years ago, we had 2% of GDP in exemptions; today it is 4% of GDP. I don’t even say back to 2, but are we going back to 3? It is a saving of 1% of GDP. If we need to get out of a deficit of -2 and go to a surplus of 2, we achieve 1/4 of that by reducing exemptions. It is already a piece.
And the rest?
Another 25-30%, should be due to expenditure cuts. And the rest, we could count on GDP growth if we had a productivity agenda. This is where tax reform, PEC 45, comes in, which simplifies taxation and would bring Brazil closer to international standards, unlocking important productivity gains. In addition, there is the collection side: reforming direct taxes, income tax, taxing dividends … A reconfiguration of this side could seek another 0.5%, 1% of GDP. But you need to have the expense on the other side.
What we are talking about here is, more or less, the same as what was said in 2018. And so far little has happened. Has the market already gotten used to this slow pace in Brasília?
I wouldn’t say the market, but we, the citizens. It is a daily and daily frustration with this resistance that there is to achieve some institutional improvement. Sectorial agendas move super fast, while collective agendas face great difficulties. I think our system has a greater difficulty than usual to solve the problem of collective action, which is to minimize the problem of interest groups in order to advance on broader agendas. This frustration is ours.
We haven’t really grown in at least forty years. We need to realize that, either we deal with collective problems, breaking the inertia of the established interests that hold us in several of these areas (which may seem naive), or we will not escape this mediocrity that we live. They are daily interests that are individually small, but that hold us together as a collective.
What interests are these? Can you give examples?
Reducing exemptions, for example, should have many votes in favor. But whoever gets there and makes noise is the minority that benefits from it. In Brazil, the guidelines are captured by interest groups more than usual. Reforming the state is in the interest of the entire population, but the civil service lobby does not let it. There are people who have benefits today and should not have any. We need horizontal rules. The question is simple: is the gain collective? Let’s do it! If the gain is individual, sectorial, we shouldn’t do it.
If we already know what needs to be done, what is missing?
Leadership is lacking. There is a lack of people who have a vision of the country, a vision that if we do not make fundamental choices, we will not move. There are few systemic decisions, but they have a great impact. But, for that, it takes leadership, diagnosis. And the diagnosis is in place. We all know that we need tax reform in this direction. And then we start to collect a little bit of growth and things change. It lacks conviction and leadership, more than anything. The state needs to work. Companies need to produce. We need to pay tax in a simple way.
Can we hope to continue on this path in 2022?
2018 was an atypical event, a rejection, a climate of rupture that may not be repeated in 2022. And there is room for a center candidacy, one or more, that will become viable. The challenge is to build them.
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