DUBLIN — Like their South African counterparts, Brazilian politicians have a lot of big ideas. As Brazil heads into its elections this weekend, presidential candidates are promising voters all kinds of wonderful things – less corruption, better health systems, better education, and better infrastructure. Yet the reality is that Brazil can barely afford to keep the lights turned on. The Brazilian government is paying most of its bills with borrowed money, after years of overspending and borrowing. Despite high tax rates, Brazil has failed to balance its budget for years, and the cheque is coming due as global liquidity dries up. If it wants to avoid the fate of neighbouring Argentina, which has seen its currency slump and interest rates soar as foreign lenders have abandoned ship, Brazil has some serious budget cutting to do. All this may sound familiar. Like Brazil, South Africa has overspent for some years now and financed the gap by borrowing heavily. Although the South African budget is in better shape than the Brazilian equivalent, SA’s politicians are going to have to walk a careful line if they want to avoid a currency or interest rate crisis. – Felicity Duncan
In Brazil, Big Plans and No Money
By Paulo Trevisani and Jeffrey T. Lewis
SÃO PAULO — Just days before Sunday’s pivotal presidential election, Brazilian candidates are promising to crack down on spiraling violence, improve weak educational and health systems and shore up the country’s crumbling infrastructure. But none of the leading candidates mention Brazil’s biggest problem: There is no money to do any of that.
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After years of overspending followed by a deep recession, Brazil’s next president will run a government living on borrowed money to pay salaries and pensions and keep schools and hospitals open.
Brazil’s public spending outstrips revenue by an amount equal to 7% of annual economic output, double the rate of last year’s U.S. budget deficit. The borrowing needed to cover the gap has pushed debt to close to 80% of Brazil’s gross domestic product. That level is higher than that in most other emerging markets and is fast becoming unsustainable, economists say.
“All questions about Brazil’s future come down to fixing the budget,” said Guilherme Figueiredo, manager of a $1.4 billion investment fund at M. Safra & Co. in São Paulo. “Some candidates understand the problem, others don’t. We are very apprehensive.”
Brazilian voters will choose among 13 candidates facing off on Oct. 7. None are expected to get more than half of the votes, so the top two finishers are likely to contend against each other in the Oct. 28 final round. Polls suggest that is likely to pit conservative Jair Bolsonaro, a former army captain, against leftist Fernando Haddad of the Workers’ Party.
Brazil’s budget problems are difficult to overstate. Already, about two-thirds of the budget goes only to paying old-age pensions, public health care and the payroll of Brazil’s bloated public sector. Absent reform, by 2020 those liabilities will have grown so much there will be nothing left over for so-called discretionary spending items such as roads, new hospitals or police equipment, said Mansueto Almeida, a leading economist at Brazil’s Finance Ministry.
The solution, economists say, is likely austerity, especially trimming pensions and freezing public-sector wages and hiring. Taxes are already equal to 40% of output, according to the CIA’s World Factbook website—a comparatively high rate for emerging economies—leaving little room to fix the budget by raising them.
Tax increases are in any case not likely to play well with voters already struggling in a weak economy with 12% unemployment. Chronic underinvestment has put the country in the lower ranks of emerging markets in terms of infrastructure, health care and education. Brazil, for example, has only 3.2 hospital beds per 1000 people, fewer than Cuba, which has 4.4, and exactly half as many as in neighboring Argentina, according to the World Bank.
National budget woes are of little concern to voters like Maria Aparecida Melquiades Costa, 58, who complained about shabby public hospitals as she accompanied her son receiving treatment in São Paulo for a work-related injury recently.
“It just takes forever to see a doctor, and even longer to get treatment,” she said. She fumed about Brazil’s political establishment and said she planned to cast a blank ballot on Sunday. “I don’t think anyone is going to help,” she said. “There’s always going to be politicians stealing from us and never enough money.”
Markets are increasingly anxious about Brazil’s growing debt. The Brazilian real has lost around 9% against the dollar since the start of May, when the presidential campaign got under way, and the Ibovespa stock index is down 4% over that same period.
International investors are currently making a general exodus from global emerging markets, but they became more nervous about Brazil during the campaign since candidates seemed less than eager to tell already-suffering Brazilians they need to see pensions cut or public companies privatized to fix a problem as arcane as a budget deficit.
“The problem requires a quick and convincing answer,” said Alberto Ramos, top Latin America economist at Goldman Sachs in New York. “But it doesn’t seem Brazilian society is convinced that austerity is needed.”
Mr Bolsonaro has raised the most hopes in financial markets of tackling the endemic spending problem. While the conservative candidate has stressed safer streets for voters, his top economic adviser, economist Paulo Guedes, has promised investors fiscal austerity—a big reason why much of the country’s private sector backs the candidate, despite controversy over his support for the country’s former military dictatorship and his stance on social issues like gay rights. (Mr Bolsonaro once said parents could beat the gay out of their children.)
But there is no guarantee that Mr Guedes would have autonomy to run the economy if Mr Bolsonaro wins. The candidate shot down his adviser’s plans to reintroduce a financial-transactions tax to shore up government revenues.
And as a lawmaker last year, Mr Bolsonaro didn’t support a major pension overhaul. There is also no guarantee the team could get any spending cuts through a fractious and divided congress.
Mr Bolsonaro’s campaign didn’t respond to requests for comment.
If there are questions about Mr Bolsonaro’s commitment to austerity, there is outright alarm over his major opponents, especially former São Paulo Mayor Fernando Haddad. He is the candidate of a leftist coalition led by the Workers’ Party, which governed the country from 2003 to 2016 and largely created the looming debt problem.
Mr Haddad’s camp pledges to pump more taxpayer funds into the economy to create jobs. The resulting economic growth, they argue, would cause debt to decline as a percentage of the economy.
“It’s fundamental to confront public deficits and reduce public debt as a percentage of GDP,” the Haddad campaign said in emailed answers for this article. “The necessary condition for that to happen is a revival of economic growth.”
Some market players fear that plan could backfire. A 2016 spending-cap law forced Brazil’s congress to limit spending increases to inflation. Some economists fear that instead of overhauling pensions, politicians will simply scrap the spending cap to keep spending on schools and hospitals, whether by borrowing or simply printing money.
Either course, they say, could fuel inflation and a return to Brazil’s long past of economic crises.
“We could go back to the old spending orgy,” said José Francisco Gonçalves, chief economist at São Paulo-based lender Banco Fator.
Write to Paulo Trevisani at [email protected] and Jeffrey T. Lewis at [email protected]
