States financial crisis

Image: Kostiantyn Vierkieiev


The fiscal problem of state governments cannot be discussed solely as a financial constraint

“In this game, excluding some Prussian dreamers, ideas were permanently at the service of tactics more than strategies, “liquidity” more than production, that is, perfectly in their place: that of Brazilian crises” (José Luís Fiori) .

The renegotiation of state debts tends to be treated in isolation, as just a financial restriction. This prevents us from asking what the role of state governments and, therefore, their finances is. In other words, this discussion only makes sense if it is related to the federative issue. This is not limited to the distribution of resources, but involves the relationship between state power and the strategic management of territory in the country.

In the mid-1990s, the process of renegotiating state debts began, which has been ongoing to this day. This process takes place when the (monetary) stability convention achieves hegemony and makes the national State its guardian, while uncritical adherence to the globalization paradigm encourages the change to competitive federalism in practice (despite the cooperative model in the constitution). These trends make the relationship between the Union and subnational entities guided by a predisposition to identify potential inflationary risk in the latter's spending and imbalance in the context of growing fiscal war.

In 2018, when the first year of the Fiscal Recovery Regime – RRF was completing, I emphasized in an interview how much its framework reaffirms a logic of usury. After all, it summarizes the relationship between the Union and a subnational entity as a mere relationship between creditor and debtor, whose central concern is to provide conditions for reorganizing the payment flow so that it continues. As a moneylender, the creditor does not include in his assessments the socioeconomic effects on the subnational reality of imposing a recessive adjustment, as long as the fiscal result is pursued.

In general, the Union assumes a restricted control role, limited to sanctions, while few coordination mechanisms are implemented. Ultimately, it acts as interest-bearing capital which, focused on valuation criteria, is detached from any responsibility shared with the public policies of subnational entities (they have already been interrupted to prioritize debt payment).

Therefore, the fiscal problem of state governments cannot be discussed solely as a financial constraint. In fact, the problem is not assuming an obligation, but rather what purpose it serves. It can be an ideological instrument to forcefully impose austerity measures and administrative reforms solely to increase savings and greater ability to pay for them. Conversely, it can be an inductive planning instrument as one of the forms of financing an intra-federative development strategy.

Therefore, debt is only a problem when an asymmetric power relationship is revealed that takes away federative autonomy, and without any set of priorities that is associated with strategic management of the territory.

The National Treasury Secretariat – STN (a body linked to the Ministry of Finance) plays a central role in the processes of renegotiating state debts. In a doctoral thesis defended at FGV/SP, Rogério Ceron (2021, p.86), the current secretary of the National Treasury Secretariat, stated that: “[Rio de Janeiro] is the most emblematic case of fiscal bankruptcy in Brazil in current situation and there is no horizon of recovery ahead or a solution to the debt (the state continues to not bear the debt burden)”. In the same thesis, he went further and also stated: “as has occurred at other times, the state has not addressed structural solutions and is awaiting yet another rescue and debt forgiveness from the Federal Government. Also an emblematic case of fatalistic resilience, betting once again on bailout (…) ”

The current position of the Rio de Janeiro government does not seem to be able to refute this assessment, when it decides to retaliate in public opinion and take the debt issue to court. The despair explains itself. In the first year of the new Fiscal Recovery Regime, 2022, it was in default due to failing to fulfill its fiscal commitment (expected primary result target). According to legislation, in addition to suffering a fine, you are at risk of the regime being terminated if you stay this year again (i.e., two consecutive years). There is no shortage of concerns when the deficit forecast is R$8,5 billion for this year and R$13,7 billion for 2025 (according to the PLDO sent to ALERJ recently).

If it is unacceptable for the Union to assume a loan shark stance, to assume the Sartrean position of “hell is other people” and ignore the debate on counterparts borders on nonsense. Including quickly rejecting the Ministry of Finance's innovative proposal to reduce charges in exchange for greater state investments in education.

The story could be different. In the same year of defending the academic thesis of the current secretary of the STN, the government of Rio de Janeiro began to build a Fiscal Recovery Plan – PRF, which later developed into a Strategic Plan for Economic and Social Development – ​​PEDES. Its main originality lies in not only presenting a developmental solution for fiscal rebalancing (which received technical approval from the previous administration of the National Treasury Secretariat), but seeking to be a protagonist in the national debate on a profound change in the framework of the Fiscal Recovery Regime and, if possible, until it is overcome by a new federative policy. Since then, the state government has dissociated one plan from the other, distorted the first and has little effect on the second. The question that remains is: why?

In order to carry out a new “flight forward” and disguise their refusal to follow any strategy, they prefer to call Raul Seixas and shout: “we are not going to pay anything”. In fact, the academic thesis of the current secretary of the STN was not an exaggeration. The Rio de Janeiro government confirms its history of not prioritizing structural solutions (even though it had previously presented them in the PRF and PEDES). What's more, it follows a tradition of waiting for the problem to reach a critical level to call for a new injection of liquidity, even with a systematic lack of commitment to results that demonstrate that it is reducing its fiscal unsustainability. In this case, the problem is not the debt, but a political-institutional weakness that it explains as a limit to effective and strategic technical management.

Ensuring greater social control mechanisms is fundamental. After all, the general population and even the majority of civil servants are unaware of the PRF and PEDES, and what is at stake due to political options. As an example, the loss of inflationary compensation for state employees which, after almost a decade, had returned with the approval of the PRF that technically supported it and was no longer given this year.

*Bruno Sobral is a professor at the Faculty of Economic Sciences at the State University of Rio de Janeiro (UERJ) and coordinator of the Pró-Rio Network.

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