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CASE STUDY: Um imenso Portugal

An ever-deeper hole

At a seminar at the Fernand Braudel Institute in São Paulo on June 6th, Mansueto Almeida (Portuguese-language blog), an economist at IPEA, a government-funded think-tank, spoke about developments in public spending in Brazil. A coincidence of timing meant that earlier the same day S&P had cut its outlook for Brazil's credit rating from stable to negative, meaning the ratings agency saw a one-third chance of a downgrade in the next two years. It cited modest economic growth, fast-growing public spending and "some loss in the credibility of economic policy" as reasons for its decision.

Every Brazilian administration since the return to democracy in the late 1980s has increased public spending as a percentage of GDP, Mr Almeida pointed out. The tax take is now 36% of GDP, far more than in other middle-income countries, or the rest of Latin America, or indeed several developed countries, including Japan and the United States. At the federal level, the increase has been driven by income redistribution, not investment or spending on civil servants' salaries (though the latter has risen too).

By Mr Almeida's calculations, 84% of the increase in federal spending in Brazil since 1999 has come in two spending areas alone. The first and very much larger is INSS, the compulsory, pay-as-you-go pension scheme for private-sector workers in the formal economy. (This is very similar to America's Social Security retirement programme, but with far higher contributions from both employers and employees and a far more generous ratio of benefits to contributions.) The other is a clutch of social programmes funded by general taxation, including the famous Bolsa Família, which gives modest sums to around 12m very poor families; non-contributory pensions for rural workers; unemployment benefits; and a state top-up for workers in the formal sector on very low salaries.

One way to slow the growth in such transfers would be to make fewer people eligible for them. By far the best approach would be to bring in a sensible minimum retirement age: short vesting periods mean that Brazilians draw their pensions absurdly early, in the private sector on average at age 53. Another would be to make the benefits less generous (apart from the Bolsa Família, which pays out relatively low amounts and is very cost-effective): Brazil's constitution mandates that most state benefits, though not those paid under the Bolsa Família, must equal or exceed the minimum wage, which has been growing fast in recent years. Ideally, Brazil would break this link: guaranteeing pensioners at least the minimum deemed a decent recompense for full-time work makes no sense at all. But there is no sign that the government has the appetite for the fight this would take in Congress, or indeed that it could succeed, given the three-fifths majorities in both houses needed to change the constitution.

That leaves a third option: slowing the growth in the minimum wage. For the last several years its value has gone up in nominal terms by the sum of the previous year's inflation and GDP growth from the year before that. (Annual GDP figures are always published a bit later than annual inflation figures, which is why the government doesn't just use the numbers from the previous year for both.) The idea was to make sure that all workers got a share in economic growth, but the formula is putting federal finances under terrible strain.

This was particularly obvious in 2012, a year in which Brazil's economy ended up growing by a measly 0.9% in real terms. At the beginning of the year, though, the minimum wage was hiked by a whopping 14%—the sum of 7.5% (GDP growth in 2010, the result of a pre-election public-spending binge) and 6.5% (inflation in 2011, caused by the hangover). The president, Dilma Rousseff, has committed herself to following this rule until 2015. But no matter how politically difficult changing it will be, its growing cost will probably leave the next administration, whether led by a re-elected Ms Rousseff or someone else, very little choice.

Economist, Blog Americas view, Jun 10th 2013

Ai, esta terra ainda vai cumprir seu ideal
Ainda vai tornar-se um imenso Portugal
[Fado Tropical, Chico Buarque]

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