Brazil’s new government will have a limited opportunity to enact urgent fiscal reforms or face the risk of a return to recession and social unrest, the outgoing finance minister has told the Financial Times.
“The situation is unsustainable,” Eduardo Guardia said in an interview in London. “It will be a bumpy road and a short one, because they do not have much time.”
But Mr Guardia said he was “realistically optimistic” that changes to Brazil’s deficit-ridden pensions system would be enacted in time to avoid a bad outcome after the far-right president-elect Jair Bolsonaro and a new congress take office on January 1.
“There is execution risk, but the direction is right,” he said. “They have a chance to do well.”
Successive governments have tried but failed to address Brazil’s pensions problem, the main cause of a budget deficit equal to more than 7 per cent of gross domestic product.
The current government of President Michel Temer, in office since the leftwing Dilma Rousseff was impeached in August 2016, has presented two reform proposals to congress.
Mr Guardia said the first would save about R$800bn ($215bn, more than 10 per cent of GDP) over the course of 10 years. A second, watered-down version, already approved by congressional committees, would save R$650bn over that period. Both would require three-fifths majorities in both houses of congress to make the required changes to Brazil’s constitution.
“The first version is better but the second would still have a meaningful impact,” Mr Guardia said.
Future ministers have also proposed making limited changes that would not require constitutional amendments and could be enacted before the Temer administration leaves office or, alternatively, ditching the Temer proposals to come up with a new plan. Mr Guardia said the former would be of little use on its own while the latter carried the risk that, “if we start all over again, one year from now we will be back where we are”.
The danger of delay was that falling investment and rising borrowing costs, as investors lost confidence in the new government, would tip the country back into recession. Output has barely recovered from the recession of 2015-2016 and is expected to grow by less than 1.4 per cent this year.
“The difference last time was that the recession started from full employment,” Mr Guardia said. “Today, there are 12.5m unemployed.”
Failure to deliver reforms and growth would also undermine Mr Bolsonaro’s main campaign promise, of tackling the surge in violent crime that accompanied Brazil’s economic collapse.
Mr Bolsonaro has promised to make it easier for citizens to own and carry guns, to lower the age of criminal responsibility, to put more people in prison for longer, and to give police greater impunity from prosecution if they kill suspects in the line of duty.
Mr Guardia said such policies were unlikely to solve increasing crime, which would best be tackled by growth and rising employment.
Despite the polarisation and truculence that has characterised public and political life before and since last month’s elections, Mr Guardia said Brazil’s centrist political parties, which did particularly badly at the polls, should support the new government’s reform plans.
“We all have to get on side,” Mr Guardia said. “We all know what will happen if the reforms are not done.