U.S. Markets closed

Brazil Struggles to Keep Reform Momentum With Clock Ticking

Martha Beck and Simone Iglesias

(Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.

President Jair Bolsonaro’s attempt to rewire Brazil’s economy risks short circuiting as plans to carry out major reforms start to peter out less than a year after he took office.

After securing a significant overhaul of the country’s pension system in October, proposals to control public spending, toughen budget management, stimulate jobs, reform the tax system and shake-up the civil service have made little headway in the legislature. With regional elections due in the second half of 2020, there’s a narrow window of opportunity for Congress to act before politicians enter in full campaign mode.

Social unrest elsewhere in Latin America is adding to caution among policy makers, with Economy Minister Paulo Guedes recently warning in an interview to O Globo newspaper against giving people “an excuse to smash things in the streets.”

Brazil’s pension overhaul represented a major step toward putting its public debt on a sustainable footing, but the country needs further reforms to cut state spending, tackle double-digit unemployment, and boost its competitiveness. While Latin America’s largest economy expanded more than forecast in the third quarter, its medium-term potential depends on the removal of a series of obstacles to growth.

Yet the government’s apparent lack of urgency in advancing its economic agenda has disheartened congressional leaders pushing for change.

“What could cause protests in Brazil is exactly the unfair distribution of the public revenue, which is concentrated in the hands of a few,” Brazil’s house speaker and most influential lawmaker, Rodrigo Maia, said last week. “The reforms reduce this inequality.”

Maia’s comments reflect his growing frustration at the pace of reforms since the pension bill became law. Less than a month ago he was much more upbeat, saying in an interview that Brazil’s Congress would tackle bills on everything from taxes to a government spending cap by July.

Bolsonaro’s Inaction

The blame for inaction also lies with a president who hasn’t put his political weight behind those proposals, three reformist lawmakers, including two government allies, said in separate interviews. Guedes has hardly helped by sending too many projects at once, they added.

The government has presented not just one but three constitutional amendment proposals to reduce public spending. Each requires the backing of at least three-fifths of the lawmakers in both houses of Congress to pass -- a tall order at the best of times.

In addition, Guedes has promised to send a four-stage tax reform as well as a proposed overhaul of civil servant careers, a plan that’s bound to face resistance in the legislature, potentially triggering protests from their influential lobby. Congress has just six months to approve these projects before lawmakers start focusing on elections in October.

Guedes appears undaunted, saying he comes “from the private sector” where he was used to work “with big, bold targets.” But many legislators are downgrading their expectations for 2020.

“This slowdown is the consequence of a president who doesn’t understand the economic agenda and doesn’t treat it as the priority he should,” Thiago Mitraud, a lawmaker from the reformist New Party and a government ally, said in one of the interviews. “Unfortunately, this could lead to the watering down of reforms and we could see a far lesser outcome than we had anticipated.”

The presidential palace declined to comment for this story.

In a an indication of the government’s difficulties, one key congressional commission will only finish analyzing in 2020 the emergency constitutional amendments that give the government instruments to comply with a mandated spending cap. The Bolsonaro administration had hoped that at least one of those changes would pass this year.

“The government has presented all kinds of projects without coordinating with the congressional agenda,” Pedro Paulo, a legislator from the government-allied Democratas Party, said.

Worker Backlash

The president decided to push back a shake-up of the civil service aimed at cutting costs until next year, fearful of the potential backlash from public servants in the run-up to elections.

The government’s employment program has also run into serious legislative resistance. The proposal aims to tax individuals receiving unemployment insurance to offer tax relief to companies offering jobs.

“The fact is that the government doesn’t have a tax proposal for the country,” said Paulo.

(Adds details on Rodrigo Maia in 7th paragraph.)

To contact the reporters on this story: Martha Beck in Brasilia at mbeck96@bloomberg.net;Simone Iglesias in Brasília at spiglesias@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, ;Walter Brandimarte at wbrandimarte@bloomberg.net, Bruce Douglas

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.