Does Brazil need a new version of emergency aid in 2021? Three economists’ opinions

RIO DE JANEIRO, BRAZIL – The year 2021 did not begin well in Brazil. The number of Covid-19 infections has risen again. The rolling average of deaths again exceeds one thousand a day. This situation, coupled with the federal government’s poor assertiveness in purchasing vaccines, has created a scenario of instability. Restrictions imposed in some major cities, such as São Paulo, Manaus and Belo Horizonte, are impacting the economy.

Tendências Consultancy projects that GDP will grow by 0.3% in the first quarter and be almost zero in the second. In other words, the economy will be stagnant. The outcome: millions of Brazilians unemployed and with no income. According to FGV Social data, the proportion of Brazilians living in extreme poverty reached a record in January: 12.8% live on less than R$8.20 a day. It was 11% in 2019.

In this context, many advocate the return of emergency aid. Last year, the five R$600 and four R$300 installments benefited 120 million people. The program’s importance is shown by the number of poor Brazilians having reached an historic low of 4.5% in August.

The federal government was reluctant for some time to reinstate the benefit. On a number of occasions, Economy Minister Paulo Guedes was opposed, because he fears a huge shortfall in total public finance, which closed last year with a R$743 billion deficit and debt reaching nearly 90% of GDP. However, he has been more open to the idea recently, as have other sectors of the federal government and Congress, provided that there is reduced spending.

Among the proposals under consideration by the government, according to Folha de S. Paulo, is a leaner and more targeted version of the aid, called ‘Bônus de Inclusão Produtiva – BIP’ or (Productive Inclusion Bonus). The new program would distribute three R$200 installments to some 30 million informal workers, half the number of aid recipients last year. Informal workers who are not enrolled in the ‘Bolsa Família’ (Family Grant) and who need to attend professional training courses would be eligible for the benefit.

The new program would cost R$6 billion per month – much less than the approximately R$50 billion spent monthly with the program in 2020. The government wants to condition the BIP on spending cuts in other government areas. One of the proposals is to include a public calamity clause in the so-called Federative Pact PEC (Proposed Constitutional Amendment), that would loosen spending restrictions and allow for fiscal adjustment measures in times of crisis.

Three economists were asked whether or not Brazil truly needs a new version of the emergency aid – and how it could be designed to have as little impact on public accounts as possible.

“The economic situation is fragile, a rebound hinges on widespread vaccination, and the labor market reflects these uncertainties. In this context, it makes sense to propose a new temporary aid”, says Felipe Salto, executive director of the Independent Fiscal Institution (IFI), a Senate body responsible for assessing the impacts of public policies on the government’s fiscal situation, among its goals.

The end of emergency aid is already impacting the economy. In January, the savings account closed the month losing R$18.15 billion – the largest disbursement since 1995. However, this did not keep sales up. According to GfK survey company, the sales volume of durable goods fell 5% in the month compared to January 2020. The number of car registrations dropped 30% over December, according to the Brazilian Automobile Dealer Federation (FENABRAVE).

“The worsening of the epidemic and the end of emergency aid are good reasons to rethink the evolution of economic activity throughout 2021,” wrote economist Alexandre Schwartsman. According to Schwartsman, if the number of Covid-19 cases should remain high, governments will need to reestablish social distancing measures – and emergency relief would be crucial in this context. He believes there is room to create a new, leaner version of the program to reach those who really need it. Last year’s program, according to him, reached more people than needed.

The challenge is to factor this new expense in the budget. “Today there is no room for the aid to be reinstated,” says Caio Megale, chief economist of XP Investments. According to him, the country would need to raise its indebtedness, a complex decision. “The higher the debt, the higher the interest up front, which increases the cost of paying the debt.”

The simplest solution is for the federal government to use the extraordinary credit instrument. This loophole, allowed under the Constitution, deducts spending with the benefit from the calculation of the spending cap (a rule that prevents spending from rising over inflation).

It would be easy if it were simple. In fact, the allocation of extraordinary credits is nothing more than a stunt – a legal one, it should be noted – to prevent the breach of the cap rule. The real impacts of spending on the calculation of the primary surplus and on public debt will not vanish. This is where the situation becomes (much) more complex.

According to economist Alessandra Ribeiro, director of Macroeconomics at Tendências Consultancy, with or without a new round of emergency aid, the government will breach the spending cap in 2021 by at least R$3 billion. So, the argument is really over the extent of the shortfall. “The economy is at a standstill and pressures to reinstate the aid are mounting, but the fiscal situation is delicate. In practice, the blanket is too short,” she says.

Tendências created a scenario in which the government does not reestablish the emergency aid, but rather expands the Bolsa Família, from 14.1 million families in 2019, who received an average benefit of R$ 190, to 17.5 million families, who would then receive an average of R$300. The cost to the public coffers would grow from R$35 billion to R$67 billion. And the excess over the spending cap would increase tenfold in relation to the initial projection, excluding the impacts on debt and primary deficit.

Source: InfoMoney