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| Eduardo Guardia |
In meetings with the advisers of the leading presidential candidates, Finance Minister Eduardo Guardia and Central Bank president Ilan Goldfajn have said that the pension reform that is in Congress can and should be passed right after the elections, still in the months of November and December, as long as the president to be elected in October is in agreement. The reform is the passport to a gradual adjustment of public accounts. And without it “there is no way,” Mr. Guardia said and repeated.
“It is a luxury, at this point in the race, to be able to speak still of gradual adjustment. Most countries were not able to do it. Look at what happened in Argentina! We will be able if the reform bill passes and there is commitment to the spending cap,” Mr. Guardia assured to Valor. Then, if the new president wants to make more changes in the pension regime, he or she can do it, but having already approved a minimum.
“The key message was that, in our view, there is no solution without the pension reform. The one that is in Congress has already been approved at the committees and only needs voting on the floor to pass. I spoke with President Michel Temer and with the Chamber of Deputies speaker, Rodrigo Maia, who are in agreement,” the minister said. To come into force, the constitutional amendment proposal needs to be voted twice in the Chamber and twice in the Senate.
“I think it would be an extraordinary gain for the country to begin a new administration with the reform passed. We are offering something that would be fantastic for whoever is elected. It is a gesture of greatness of President Temer,” he added.
The candidates’ public comments after these talks, the minister said, were not clear enough to tell whether they are willing to take the offer.
“Without the reform, the spending cap will not work, the gradual adjustment will not be possible, the fiscal situation will not be sustainable, the debt will not stop growing and we will head to a risky situation,” the minister summed up.
“We also told [the advisers] that we want to make a civilized transition. We will open all accounts, show what the main decisions that must be taken in the first 100 days are. Unlike the transition to our administration, which had nothing, no information, we will make the transition in an organized way. Which, by the way, is our obligation,” he added.
Mr. Guardia has a clear diagnosis. The country’s fiscal problem is of spending, not of revenues. Brazil has a gross tax burden of 33% of GDP, a debt “dangerously” close to 80% of GDP and a primary deficit of 2% of GDP. It is not possible, he said, to solve the fiscal problem — moving from a 2% deficit to a 3% surplus, therefore an adjustment of five percentage pints of GDP — by raising the tax burden. “You can’t put 5 percentage points more of GDP of spending there and increase the burden to 38% of GDP with taxes not shared with states and municipalities or to 42% of GDP, if they are shared.”
Enabled by the new pension system, which would represent R$650 billion in savings in ten years, the spending cap is a credible mechanism that will allow the country to carry out a gradual adjustment, he advocated.
With the reform approved, they may even breakthrough the spending cap one year. “There is no problem,” he said. Constitutional amendment 95 states that if in one year the government doesn’t comply with the cap, in the following it may not increase spending on personnel, it will not be able to hire or launch new hiring tests, and it won’t be able to create new programs or subsidies. With such lock, the public spending would return to a trajectory compatible with the cap, he said.
One calculation that government economists make is that in ten years with the spending cap, the federal spending would fall from the current 20% of GDP to 15%. That is, five percentage points of GDP, at a rate of 0.5 per year. “It is what we need to make the adjustment and return to the spending level of 2005, which ranged between 14% and 15% of GDP,” he said. It was in 2008 that the federal spending rose to 17%, and then to 20% of GDP.
What would happen if the cap was violated in all years from 2020? The minister made the question and answered: “Instead of falling five percentage points of GDP, the spending falls 3.5 points. Still, it is a relevant adjustment, as long as you make the pension reform. Without the reform, there is no way,” he reiterated.
Some candidates consider the pension reform unnecessary and suggest the capitalization regime.
Mr. Guardia explained: the pension system has two problems that must be solved: of inequality — some retire with monthly benefit of R$20,000, some retire at 52 years of age, some accumulate pension and retirement benefits, and some receive a minimum wage as benefit. The country needs a single rule for all. And there is the issue of sustainability. The current regime is permissive, spending only grows and the country is aging. The demographic window is over and we didn’t use it. Brazil spends from 13% to 14% of GDP on social security, amount that corresponds to what Japan and Germany, countries that already aged, spend.
The capitalization regime, by definition, has no deficit. But it is necessary to decide who will pay the bill of those retired today or about to retire. In the pension system of public servants for the three levels of government alone, this bill is R$7.1 trillion — the actuarial shortfall of this regime. More than Brazil’s GDP.
It is even possible to discuss the capitalization after the sustainability problem of the current system is solved, Mr. Guardia admitted. But it will have to raise taxes, and those who advocate the proposal don’t say this.
There are also candidates promising to exempt from income taxes individuals earning up to five minimum wages. This measure would cost R$60 billion a year. “Who will pay?” he asked, in reference to the proposal of the Workers’ Party (PT) candidate, so far announced by its vice-presidential candidate, Fernando Haddad.
“There is no simplistic solution for this,” the minister said. And the tough measures don’t stop in the passage of a new pension system. There are other battles to be waged. “You must review mandatory expenditures that continue growing, like personnel. We had the courage of sending another provisional measure postponing the raise for servants of next year, to help the next administration, which we don’t even know what will be.”
Mr. Guardia stopped in the middle of the talk to vent: “President Temer is massacred and when he has an act of greatness, to help a government that we don’t even know who will be, there is no credit to the government.”
Another focus of cuts is likely to be of tax spending, which are the subsidies granted or tax breaks. This spending was of 2% of GDP in 2003, and currently corresponds to 4.5%. The average of tax spending in the OECD countries is 2% of GDP. These are benefits granted to specific sectors through exemption of reduction of taxes, which highly contribute to income concentration. In general, they don’t undergo any government evaluation and most of the times are granted without date to end.
The case of the National Museum of Rio de Janeiro, destroyed by fire a week ago, is unfortunately the example of lack of evaluation of government spending in the country. The transfers to the Federal University of Rio de Janeiro, responsible for the museum, were growing over the last few years, Mr. Guardia said, but the money was spent on staff compensation. In the administrations of Luiz Inácio Lula da Silva and Dilma Rousseff, Mr. Guardia said, the Ministry of Education hired 100,000 workers for universities.
Another example of spending without criterion was the FIES, the federal student loan, which left R$60 billion in unsecured loans that if not paid by the students will have to be covered by the National Treasury.
Mr. Guardia said the FIES was created in 1999 by the executive secretary of the Finance Ministry, Amaury Bier, by Luciano Oliva Patrício, of the Education Ministry, and by him, who headed the National Treasury. “We wrote the law of the FIES, which replaced the education credit, Creduc, which had one guarantor. Until 2010 the FIES worked normally.” In 2010, however, the then-minister of Education, Fernando Haddad, decided to create a guarantee fund for the FIES. The government put some R$4 billion in the fund and started to lend without guarantees.
