Budget 2021 may cause “shutdown” in the Brazilian economy

RIO DE JANEIRO, BRAZIL – The Minister of Economy, Paulo Guedes, warned President Jair Bolsonaro that the 2021 budget would be “unfeasible” with the accounting maneuvers approved by Congress to accommodate the festival of parliamentary amendments.

Calculations of the economic team made on Friday, 25, show that the government machine would have to work with only R$49.5 (US$9) billion by the end of the year – almost half of what experts consider the minimum level to not have a shutdown.

This is the space left to spend after the spending cuts that will have to be made to comply with the spending cap (the rule that limits the growth of expenses to the inflation rate).

These are the discretionary expenses, precisely the cost, and investment, which guarantee the machine’s operation and which the government is free to cut. The others, such as Social Security payments and civil servants’ salaries, are mandatory and represent about 90% of the entire budget.

The ministries should have a cut of 51.3% in their costing and investment expenses. With this level of expenditure, no minister’s budget will remain standing. The outcry will be general.

This scenario projects a situation of paralysis of the machinery, which economists call “shutdown”. The scenario is complicated by the fact that Congress approved a make-up in the forecasts for spending on Social Security, unemployment insurance, and subsidies to cut R$26 billion in expenses and make room for a gigantic amount of parliamentary amendments of almost R$50 billion (read below) – practically the same amount that will be left over for the ministers to run the government machine.

The meeting between Guedes and Bolsonaro took place on Thursday, 25, the day of the full Congress’s vote. But already at this meeting, Guedes has informed the president that he would have to make a dramatic cut in spending not to exceed the spending ceiling.

Before Guedes, Bolsonaro had received the president of the Central Bank, Roberto Campos Neto, on the same day. The Central Bank has the interest rates to manage in this difficult scenario, and the president is worried about the risk of a drop in GDP in 2021.

Articulation

In the economic area, the assessment is that the agreement reached with the presidents of the House, Arthur Lira, and the Senate, Rodrigo Pacheco, to increase by R$16 billion the amendments, in exchange for the approval of the PEC that authorized a new round of emergency aid and fiscal counterpart measures, was not fulfilled by an articulation that had behind its back the finger, once again, of the Minister of Regional Development, Rogério Marinho, to increase public resources for works.

Marinho, who has already been Guedes’ special secretary, led an articulation to reduce the forecast of mandatory expenses, mainly for INSS benefits. With this, the government will have to cut discretionary spending, including investments and costing the machine.

For the House of Representatives Budget consultant, Ricardo Volpe, the initial contingency allows the government to work for a few months, but it will be necessary to “reprioritize” spending, with a reduction in other expenses mostly part of the rapporteur’s amendments.

He explains that the cut can be linear or selective. He estimates that the money needed to fund the machine is around R$40 billion, plus R$25 billion to run ongoing projects and another R$20 billion to meet obligations and constitutional minimums, for a total of R$85 billion. With the R$49.5 billion foreseen by the Ministry of Economy, the Budget will stay on the bone, says Volpe.

According to Estadão, President Bolsonaro will not veto the budget, even with the economic area’s recommendation. Because of the way it is written, it is tough to make selective cuts. The president also doesn’t want to displease allies. But he will have to decide which of his ministers on the Esplanade will be the most affected in a contingency of this magnitude, or he will even have to opt to exceed the spending cap, with the consequences of being held responsible for a crime.

With information from O Estado de S. Paulo.