Dilma’s Dilemma: Welfare-state dream and fiscal reality

Among BRICS, Brazil has stood out over the last decade as a nation able to conciliate economic growth with social inclusion and democratic values.

Since Brazil’s credit rating was raised to investment grade in 2008, the federal administration was able to boost existing social programs and implement new initiatives aimed at closing the income inequality gap.

Seven years after, however, fiscal slippage, economic slowdown and a projected budgetary deficit for 2016 led Brazil to have its credit rating cut to ‘junk’ by Standard Poor’s. President Dilma Rousseff’s plan to reinvigorate Brazil’s economy has hit a roadblock, and it may be months before she regains momentum.

Combined with a spiralling political crisis, the economic uncertainties are challenging the once welfare-state dream of the Lula and Dilma eras.

Fiscal activism and social welfare programs  

Initially as the Chief of Staff (2005-2009) under Lula’s administration, and then as President of the Republic since 2010, Dilma Rousseff played a major role on setting up the following core social policies:

– Bolsa Familia, one of the largest social programs in the world, that provides monthly income transfers to extremely poor families.

– Minha Casa, Minha Vida (MCMV), a low-cost housing program created in 2009 to diminish public housing deficit in Brazil.

– Pronatec, the nation-wide initiative aimed at empowering the Brazilian workforce through training and technical courses.

These social programs have managed to take more than 25 million people out of extreme poverty in the past decade, provided houses for almost 6.8 million Brazilians and provided training for more than 8 million workers.

From an economic standpoint, these policies were crucial to sustain internal demand and market liquidity that resulted in a GDP growth of 5% in 2008 and 7.5% in 2010, in the midst of the commodities super-cycle.

The government’s keynesian fiscal activism – locally known as ‘counter-cycle’ policies – had successfully averted contagion from the 2008 international financial crisis.

Nevertheless, fiscal activism has crossed the lines of structural limitations of the Brazilian economy, leading the country to experience the burst of the public expenditure bubble this year.

Lack of reforms and lacerating effects 

Brazil’s booming years now contrasts awkwardly with the dire forecasts expected for the following months.

The social welfare programs launched by Lula and Dilma became an international model for poverty eradication [Xinhua]

The Chinese economic slowdown and the end of the commodities super-cycle revealed the pitfalls and fragilities of the Brazilian economy, as the export-led growth model has shown itself to be no longer sustainable.

Brazil’s political establishment did not take advantage of the last period of growth to promote structural reforms aiming at improving the business environment, cutting red-tape and production costs as well as revamping its complex tax regime.

 

Between 2004 and 2014, Brazil’s GDP grew 38%. Nevertheless, in the same period:

• Social assistance expenditures increased 92%

• A total amount of R$ 213 billion was invested to build houses for low-income families.

• Expenditure on Bolsa Familia increased 170%

• Federal tax revenues increased 76%, at half the pace.

• In 2014, federal tax revenues dropped for the first time in the decade, posting R$ 1,188 billion, a result 1.29 % lower than 2013.

If the PT governments had pushed through structural reforms, Brazil would have been able to preserve the margin of its social programs for the years, as well as to prevent a sharp decline in productivity that plunged the country into the worst recession in twenty-five years, with the GDP expecting to shrink 2.4% in 2015.

Rebalancing public expenditures

The Brazilian government has finally reckoned that the high level of public expenditure is no longer compatible with its economic outlook.

Aiming to close the budgetary gap for 2016, this week Finance Minister Joaquim Levy announced a cut of R$ 26.6 billion, from which R$ 14 billion corresponds to social programs, mostly affecting the low-cost housing MCMV and health-care programs.

Additional cuts may affect other critical social programs in the following weeks, in order to provoke an immediate positive impact to fill the federal budget gap.

File Photo: Brazilian President Dilma Rousseff (center) on the maiden voyage of a new Petrobras oil ship Sea Dragon in Pernambuco state [Image: gov.br]

Although cutting social programs is a major blow for the Workers’ Party’s political platform, an even more important and controversial but necessary decision may have to be taken by the left-wing government: the reform of the pension system in Brazil.

Brazil’s pension deficit widened from R$ 76.6 in 2008 to R$104.5 billion in 2014, as its corresponding expenditures jumped from R$ 257 billion to R$ 296 last year.

It is definitely a bottleneck to be reckoned with in order to stabilize public accounts in the future, as it represents approximately the same amount of money the government expended in 2014 through its main social programs.

More than ever, rebalancing public expenditure is the most relevant political challenge Rousseff has ever faced. Adopting ‘orthodox’ economic policies – an alternative that would be immediately rejected by her a decade ago – is now her last resort to restore confidence in the Brazilian economy.