Brazil Needs an Ambitious President

The man of the hour.

Photographer: Jin Lee/Bloomberg via Getty Images

Brazil’s new acting president is almost as unpopular as Dilma Rousseff, his now-suspended predecessor, and he may have to hand back power to her in a few months, depending on the outcome of her impeachment trial. Nevertheless, Michel Temer can be much more than a caretaker president -- and Brazil needs him to be.

Brazil’s economy faces another year of contraction. Unemployment, inflation and corporate and consumer debt are rising. Meanwhile, Brazil’s fiscal deficits have left it little room to respond, with the cost of servicing the debt amounting to 7.5 percent of gross domestic product this year.

Temer’s basic dilemma is the same as Rousseff’s: how to stimulate Brazil’s economy while also bringing its books closer to balance. Unlike Rousseff, Temer has the support of a working legislative majority, and is widely respected for his political savvy.

He’ll need both to bring about some politically painful changes. Brazil’s constitutionally mandated spending on pensions and other social expenses accounts for about 90 percent of its budget, and thanks to expansive promises, these costs have been growing faster than the economy. To balance the budget by 2018 with cuts just to discretionary spending, he would have to cut that category by an unlikely 25 percent a year.

Raising taxes is an ugly option in a country where the take amounts to about 35 percent of GDP -- more than in many developed nations. But Temer could ease taxes on the middle class and make up the revenue by boosting Brazil’s puny inheritance tax and ending the tax break for private medical expenses -- both gimmicks that benefit Brazil’s better-off. There are also plenty of things he could do to simplify one of the world’s most onerous tax regimes.

He could also rationalize entitlements such as Brazil’s relatively generous pensions, which can kick in for Brazilians in their 50s and are keyed to the minimum wage. Breaking that linkage and setting a higher retirement age are essential, especially given Brazil's changing demographics. Temer could lessen the political sting of such a move and help Brazil’s poorest by diverting some of the ensuing savings to the proven Bolsa Familia cash assistance program.

None of this will be easy. But creating a more flexible budget will free up money for needed investments in railways, ports and roads. It might also make future presidents less likely to resort to the kind of budgetary gimmicks that cost Rousseff -- for now, at least -- her job.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.