With ‘weak’ government, liberals defend Guedes to abandon reforms: ‘what is bad will get worse’ | Economy

Worse than it is, it can stay. This is the assessment of economists who saw the reform agenda proposed by the economic team as positive and who now see the risk of a setback given the weakness of Bolsonaro and the influence of the 2022 elections on government decisions.

At least two elements today make the environment in Brasilia unfavorable to the approval of reforms, points out the senior economist at MCM Consultores Mauro Schneider.

First, a weakened government — as is the case with Bolsonaro, with an approval rating of around 24% — is less likely to displease certain sectors and, therefore, is more susceptible to pressure.

“Reforms always entail gains and losses. The goal, in the end, is to generate a net result favorable to the country, but more often than not, someone loses to a majority win. A weakened government is much more sensitive to this.” , he ponders.

O second point is the approximation of the electoral cycle, when governments, especially those that do not enjoy broad support, are “tempted to prioritize projects that result in the greatest electoral gains.”

This is what seems to have happened with the Income Tax reform, he exemplifies. After a back-and-forth with pressure from various groups, the text approved this Wednesday (1) in the Chamber of Deputies creates even more distortions in the tax system, according to specialists.

In addition to the worsening of the initial proposal, the very decision to guide the reform of the IR would be an indication that the electoral cycle is in fact the government’s priority, since there are other proposals in Congress considered more important for the effort to simplify the system tax, such as the reform of consumption taxes, such as ICMS and PIS/Cofins.

“Those who have been criticizing say the IR took the lead because it would generate the benefit of pleasing the middle class,” Schneider tells BBC News Brasil.

Paulo Guedes and Bolsonaro during a ceremony in Brasília on September 2, 2021 — Photo: REUTERS/Adriano Machado

In a report sent to clients of the consultancy at the end of August, the economist assesses that it would be better to paralyze the reform agenda “to avoid the risk of approval of measures that cause a worsening of the economic environment in the country”.

Former Treasury Secretary Carlos Kawall, now director of ASA Investments, makes a similar assessment. If the “normal”, with the proximity of the electoral calendar, would be that we no longer have a favorable moment for the approval of reforms, given the current situation it ends up becoming unfavorable.

“We are at risk of approving reforms that not only are not an advance in the direction we want — from the point of view of consolidating the acceleration of economic growth, job creation — but that go backwards in things that have already been achieved”, points out the economist.

“What is being sought now is less strengthening of the institutional framework and more the approval of fiscal relief measures with an electoral purpose”, he adds, mentioning the reform of the IR and the PEC of the precatório, which proposes dividing the Union’s debts constituted by judicial decisions with a final and unappealable decision so that the government can accommodate an expansion of spending on its new Bolsa Família.

Income tax reform should generate losses of R$22 billion a year, say finance secretaries

Income tax reform should generate losses of R$22 billion a year, say finance secretaries

The worrying signs, however, are older and have appeared since the 2021 Budget was processed, says Kawall. The piece was approved in March, three months late, a series of underestimated expenses and about 22% of the total investments directed to the Ministry of Defense.

The amount foreseen for the parliamentary amendments, which deputies and senators use to spend on works in their electoral strongholds, broke a record and reached R$ 48.8 billion. After the presidential sanction, the cost of amendments dropped to R$33.8 billion, which is still a record: almost three times the total approved in 2019, in the first year of Bolsonaro’s government, R$13 billion.

“We are discussing the ‘meteor’ [termo usado pelo ministro da Economia, Paulo Guedes] of the precatoria, but we have to remember that there was a ‘meteor’ of the parliamentary amendments this year too, right?”, comments Kawall.

“If we had solved that previous meteor in another way — and we can still do it for next year — maybe the precatory one wouldn’t have been so problematic.”

Schneider recalls the most recent case of the capitalization of Eletrobras, another evidence that the government’s fragility can materialize in important distortions in the proposals that are going through Congress.

“The case was very symbolic because the MP ended up taking the famous ‘tortoises’ with its approval”, he says, referring to the additions made to the text that are not related to the theme of the proposal.

Entities in the electricity sector assess that the MP’s tortoises that pave the way for the privatization of the state-owned company may further increase the price of energy consumed in the country — contrary to the government’s discourse that the proposal could lower electricity bills by 7.36% .

One of the points included brings the forecast of mandatory contracting of natural gas thermoelectric plants in different regions of the country, a measure that would require investment to increase the existing gas pipeline infrastructure. Another foresees a market reserve for energy produced by small hydroelectric plants (PCHs), which, in practice, goes against free competition.

“The Eletrobras case was not a tortoise, it was an entire Tamar Project, right?” jokes economist José Roberto Mendonça de Barros, former secretary of Economic Policy.

At the end of May, in an article published in the newspaper O Estado de São Paulo and entitled Reformas à Moda do Centrão, he said that he judged the optimism that the financial market was showing at the time with the reforms process after the alliance between the government and the government was premature and exaggerated. Centrão — an amalgamation of parties that traditionally approach the Executive in an attempt to reap advantages, whether in the form of positions in public administration or resources they can inject into their respective electoral strongholds to guarantee their reelections.

“What I meant [no texto] it was, well, to approve something they will, but the quality of what will be approved, if it’s actually going to be worth it, is the problem.”

Income tax reform, he says, is one that most urgently deserved to be scrapped: “It’s so inconsistent that it’s better not to get anything out.”

Sardenberg: Income Tax Reform Compounds Holes in Budget 2022

Sardenberg: Income Tax Reform Compounds Holes in Budget 2022

The approval of the text in the House this week was the target of harsh criticism from both liberal economists and so-called developmentalists, two groups that generally are at opposite poles of the discussions.

Founding partner of Macro Capital Gestão de Recursos and former chief economist of the Credit Suisse bank, Nilson Teixeira recalls that even before it began to be discussed by the deputies, the proposal was already fragile.

After delivering the project, Paulo Guedes even stated in an interview that the calculations of the Federal Revenue had been too conservative, causing an error in the calibration of the proposed rates — which led to a change in the text.

“They had two years to release a proposal and they released that. What confidence do you have when they themselves had no conviction in the project?” he told BBC News Brasil.

To this element, he adds the “weak participation” of the Executive, including the President, in coordinating the proceedings in Congress, in order to sew up the negotiation between the different voices (and interests) involved in the process.

In an article published in Valor Econômico newspaper last week, entitled How Not to Make a Reform, Teixeira describes in 11 points why the proposed IR reform is an “almost perfect roadmap of how not to act to implement an effective and undistorted tax system “.

The economist says that it would be worth discussing and approving new reforms, but in a different way from the modus operandi in recent months. He admits, however, that the “incentives” go against a change, with the anticipation of the electoral debate and the high level of political polarization.

“Approving for the sake of approving doesn’t seem good to me, especially if it’s to increase or perpetuate privileges,” he says, mentioning the administrative reform, which affects civil service careers and is also being processed in the Chamber.