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Image: Tima Miroshnichenko


Lula's new fiscal anchor should be almost as orthodox as Michel Temer's

In the 2022 elections, Lula was victorious with the worker's vote, which he shared with Jair Bolsonaro, but he also won with the support of the national elite, who mostly abandoned Bolsonarism. The annulment of Lula's conviction, the broad front with Geraldo Alckmin, the support of economists from Tucano and the rise in the stock market the day after the election demonstrated that, for the first time, Lula will enter power with the prior support of Brazil's financier and landowner elite. . However, this support will be highly fragile and will demand from Lula an economic policy as conservative as the one that the former president applied in his first term as President of the Republic.

Recently, when he hinted that his government should pursue social responsibility above fiscal responsibility, the stock market fell and the dollar rose, as had often happened in previous PT governments. It is important to highlight that the financial market is not aimed at the development of the country, GDP growth, much less the increase in labor productivity. In reality, the market is looking for security in the public debt (which means fiscal surpluses), privatization of public goods and an increase in the interest rate on the public debt.

The central argument of liberal economists is that the market fears fiscal deficits because they cause inflation that reduces the predictability of private investments in the country. However, fiscal deficits are inflationary as the economy heats up, which means that the impact of fiscal deficits on inflation is smaller in periods of stagnation or recession.

The real cause of this fall in the financial market after Lula's speech is the fear that Lula will not have a liberal government as was implied in his broad front. In this way, the market demonstrates its strength in deciding the country's economic policy, causing instability and pushing for increases in the interest rate on the public debt, to compensate for Lula's intention not to make a government completely surrendered to the financial market. Such downward movements in the financial markets could be repeated if Lula makes a government that confronts the national elite and anticipates the vote of parliamentarians in the next four years.

The supposed technical explanation for speculative terrorism is the risk of inflation returning out of control, as occurred in Brazil in the 1980s, but the cause of such lack of control was the lack of dollars in the country, which was resolved with the Real Plan that forced the one-to-one parity and kept the dollar low with very high interest rates (which doubled the public debt as a proportion of GDP in a few years). Currently, dollar reserves and Brazilian exports maintain the stability of the national currency, and there is no reason for such terrorism.

Lula's third term will challenge his conciliation capacity and will place him between the workers' demands and the demands of the financier and landowner elite. Despite not having a vote or any legitimacy to exercise power, the demands of the national elite demonstrated by the movement of the financial market will put strong pressure to keep Lula in the center-right, according to the composition of the broad front that placed him in first place at the polls. Movements in the financial market also anticipate the votes of parliamentarians, who mostly serve the interests of the Brazilian elite, which will pose difficulties for the governance of this Lula mandate.

Despite occasionally adopting a confrontational discourse against the neoliberalism of the Brazilian economic elite, Lula usually goes back and explains himself, demonstrating that he will not exactly make a confrontational government with regard to economic policies in practice, outside the field of political discourse. If this is confirmed, as I believe it will, Lula will make a government with a minimal agenda in the social field, without structural reforms in the production and distribution of national wealth. If he opts for confrontation not only in speech, but in economic policy, he will have to rely on popular mobilization to deal with speculative terrorism, bomb agendas in Congress, the return of laundering retreaded in the media and requests for impeachment.

The spending ceiling as a fiscal anchor has already demonstrated its discrepancy in relation to the economy's reality, having to be set aside in every year since it came into force. Fiscal rigidity without taking economic cycles into account, and without room for fiscal deficits, is not compatible with capitalism. A better solution for controlling public spending in the long term is the goal of stability in the debt/GDP ratio, which would not only cut spending, but also increase the tax burden.

The importance of a stable debt/GDP ratio is due to the fact that the real has a low position in the hierarchy of international reserve currencies, which means that a high public debt increases the risk of the national currency and requires higher interest rates. on the other hand, causing strong and lasting economic crises.

For the debt/GDP to remain stable in the long term, fiscal surpluses will be needed in periods of booming economy to offset fiscal deficits in periods of sluggish economy. One of the best ways to calculate the desirable fiscal surplus and deficit is to do this calculation based on the output gap. For example, in the years 2015 and 2016 the output gap was around -2% and -4%, respectively, while fiscal deficits were around 2% of GDP each in those two years.

In other words, all the media terrorism oriented by the financial market that claimed that Brazil was about to break with Dilma was unfounded. The economic crisis of the Dilma government showed its face in the drop in the GDP and in the average income of the worker, which have not recovered until today, in 2022, after seven years of the beginning of the crisis. If Dilma made a larger deficit of 3% or 4% of GDP by raising the investment/GDP ratio to 20% through public investments, GDP and average income would probably have recovered, and the debt/GDP ratio would not continue to rise until 2020, when the drastic drop in the SELIC rate under Jair Bolsonaro held back the increase in public debt.

It is a consensus among heterodox and orthodox economists that GDP growth and average income increase only if there is previous investment. Therefore, maintaining 20% ​​of GDP per year of investment, including private and public investment, is essential to maintain an annual GDP growth trajectory, which also contributed to the reduction of the debt/GDP ratio. If we go back to 2015 and 2016, however, we could not propose an increase in public investment as a solution to the recession since the Lava Jato operation had stopped most of the infrastructure works across the country.

Lastly, it is important to reassess the role of the Central Bank in determining the country's basic interest rate. The function of the SELIC should be to pay the risk price of the real in relation to the dollar, offering the market a real interest rate corresponding to the risk of Brazilian public bonds, which today would mean a real interest rate of around 2% per year, that is, a SELIC of 7%. In addition, another function of the SELIC is to prevent an exacerbated drop or rise in the dollar in the country, preferably seeking a dollar between R$4 and R$6.

Brazilian inflation of around 5% a year should not be a cause for alarm and raising interest rates causing recession. When inflation is not related to an increase in the dollar or prices administered by the government, it must be fought with fiscal policy, that is, with fiscal surpluses. High inflation in a negative output gap period, as a rule, is dollar inflation or administered price inflation, like the current one. An inflation between 3,5% and 6,5% could be the Central Bank's target, instead of the current target of inflation between 1,5% and 4,5%, which does not correspond to a realistic target in a country on the periphery of capitalism like Brazil.

In this way, a fiscal anchor that places an investment target at 20% on the balance, debt/GDP stability in 10 years and forecasts fiscal surpluses or deficits according to the positive or negative output gap is my general idea for a macroeconomic administration of the economy of Brazil. However, it is always necessary to take into account that economic policy depends more on the correlation of forces in national politics, which includes political and economic power, than on technical issues. Therefore, a new fiscal rule is necessary that, while considering the economic cycles of capitalism, contains the increase in the Brazilian public debt to please the financial market and all its power over Brazil. However, such a decision is unlikely to come to pass, and Lula's new fiscal anchor is likely to be almost as orthodox as Michel Temer's.

*Bruno Machado is an engineer.

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