Dilma Rousseff Learns Fiscal Crime Doesn't Pay

Dilmageddon.

Photographer: Mario Tama/Getty Images

At her impeachment trial this week, Brazil's suspended president Dilma Rousseff warned of the "death of democracy," comparing the senators trying her to the military tribunal she faced as a young woman fighting dictatorship.

The actual charges against Rousseff -- which she has denied, and for which she was impeached on Wednesday -- are more mundane: that she manipulated the federal budget to hide Brazil's true economic condition, and spent money without congressional approval. Yet they point to one of Brazil's biggest problems: the persistent abuse of state resources to advance partisan or personal fortunes, with huge costs for the country at large.

The fiscal responsibility law that Rousseff was accused of violating is intended to prevent unauthorized spending, balance government accounts and save future administrations from having to pay for their predecessors' populist sprees. By delaying repayments to state-owned banks for social programs, Rousseff's administration was able to bust its own budget while seeming to stay within legal bounds. In fact, this strategy enabled the government to "overspend" by tens of billions of dollars from 2012 through 2015, in part to pay for Rousseff's expansive re-election promises.

QuickTake Brazil's Highs and Lows

Rousseff's defenders argue that her behavior was no different from her predecessors' and that her accusers face their own serious ethical challenges. The latter assertion is certainly true. But neither is an excuse. Over the past two years, Brazil's budget deficit has more than tripled to around 10 percent of gross domestic product, making it that much harder to revive an economy in recession.

At its worst, Brazil’s statist fiscal chicanery has helped underwrite fat subsidies to big companies that are political contributors, feeding the same toxic nexus that gave rise to the multi-billion dollar Petrobras scandal. It has also hindered an honest public debate about Brazil’s generous social welfare programs. While some of these have lifted millions of Brazilians from poverty, others –- especially pensions -- have added to the country’s enormous fiscal burden. Hence Rousseff’s alleged attempts at creative accounting when hard times hit Brazil.

Now, acting President Michel Temer faces the hard task of cutting spending even as unemployment rises. He has already won legislative concessions to make Brazil’s budgeting more flexible and introduce a temporary spending cap. While his proposal for badly needed pension reform will prove controversial, especially with municipal elections slated for October, he has no choice but to push ahead.

In the short term, Temer’s best bet is to spur growth by making Brazil’s economy more attractive to outside investors, whether by allowing greater participation in sectors such as oil and aviation, streamlining Brazil’s onerous labor laws, boosting trade (which accounts for a tiny share of GDP), and reducing political meddling in ministries and state-owned enterprises.

Unfortunately, the Temer administration’s predictions for economic growth next year (and rising tax revenues) outstrip most estimates. Future Brazilian leaders should consider Rousseff’s fate a salutary warning against too-rosy scenarios and the fiscal fiddling that accompanies them.

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