Brazil’s Fiscal Plan Could Falter Without Pension Reform

  • Spending cap without cutbacks on pensions would squeeze budget
  • Raising taxes next year is “Plan C,” Secretary Almeida says

Acting President Michel Temer’s prized fiscal austerity proposal to cap public spending will only succeed if he can convince Brazil’s Congress to pass a controversial pension reform as well, according to a leading member of his economic team.

While Temer’s administration is confident it can win congressional approval this year of a constitutional amendment to limit federal spending, the inability to cut back on retirement benefits would put public finances at risk, said Mansueto Almeida, the Finance Ministry’s secretary of economic monitoring. A spending cap with growing pension obligations would squeeze other areas in the budget such as health care, he said.

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“With the constitutional amendment, spending will be limited, and without pension reform, those costs are going to just grow and grow and grow,” said Almeida, who studied public policy at the Massachusetts Institute of Technology and ran a popular blog on public finance before joining the ministry.

Any failure to shore up public accounts would be a major setback to Temer, who since entering office in May has pledged repeatedly to shrink a near-record budget deficit and contain inflation in order to revive investor and consumer confidence. Temer, 75, will govern until the end of 2018 if the Senate decides to permanently oust his predecessor Dilma Rousseff in an impeachment vote that’s anticipated by early September.

Possible Reforms

Temer’s economic team expects to finalize its proposal for pension reform by the end of this year, meaning in the best-case scenario it would get congressional approval in 2017, Almeida, 47, said in an interview. Congress hasn’t set a date to vote on spending limits.

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Pension reforms could entail setting a minimum retirement age and cutting back on benefits, Almeida said, adding that the government would probably offer a transition period that would gradually apply the law to workers.

The length of the transition phase will probably be a point of negotiation with groups resisting reform, Almeida said. He cautioned against waiting too long to implement the changes, since federal spending caps could be in place as early as next year.

Labor unions and left-leaning politicians have denounced talk of cutting back on pensions, saying that would be an affront to workers’ rights. Almeida said the government intends to hold a frank discussion with society to show how Brazil’s retirement system is unsustainable, especially if Congress agrees to limit federal expenditures. According to government estimates, pension costs as a percentage of gross domestic product will more than double by 2060 to 17 percent from 8 percent this year.

“The spending cap bill will inspire a more serious debate about what makes sense to spend money on,” he said.

Even if it caps spending next year, the government’s challenge in 2017 will be to meet its commitment to shrink the budget deficit before interest payments, Almeida said. The administration should be able to hit its target by selling assets such as real estate and subsidiaries of state companies.

“The Treasury is consulting with each ministry to see what they are going to sell and how much can be raised in each area,” he said.

‘Plan C’

Temer’s economic team hasn’t ruled out tax increases, though Almeida described them as a “Plan C” only to be used if Brazil is far from reaching its fiscal goals. The gasoline tax known as Cide, which the government can raise without congressional approval, is out of the question, he said.

“The impact on inflation would be too big,” Almeida said. “The president of the central bank would come in here and kill every one of us.”

The government is revising up its 2017 GDP forecast to a 1.6 percent growth, which means more revenues that could allow the administration to meet its fiscal target without raising taxes, newspapers Valor Economico and Estado de S. Paulo reported.

Closing tax loopholes can also help the government shore up public accounts without increasing Brazil’s already heavy tax burden. The country’s nominal budget deficit hit a record 10.89 percent of GDP in January, before easing to 9.96 percent in June.

Temer also wants to make industry regulations and labor requirements more flexible in order to attract investors and revive growth. Almeida presented all of these changes as part of a sweeping reform agenda to get the economy back on track following the longest recession in decades.

“The government’s whole strategy is focused on structural reform,” he said. “This is going to change the reality of the country, if approved.”

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