Is there no alternative?

Image: Rodolfo Clix


Austerity, politics and ideology of the new fiscal framework

As a government elected with promises of growth in employment, public investment and social spending, and with strong criticism of the neoliberalism inherent in the Spending Ceiling, ended up proposing a very restrictive fiscal framework and, without public resistance to replacing the rapporteur in the Chamber of Deputies, Deputies, recommending the vote of your parliamentary base in an even more restrictive framework? To answer the question, the first part of the article discusses economic aspects of the fiscal framework from the proposal to approval in the Chamber and revision in the Senate. The second addresses the ideological convergence between the Ministry of Finance and the Central Bank in defense of fiscal austerity. The third discusses the relationship of political forces in the processing of the fiscal framework, and some scenarios.

The new fiscal framework (NAF), renamed the sustainable fiscal regime (RFS), was approved by the Chamber of Deputies on May 24, 2023 with changes that made the project sent by the government even more restrictive. On June 21, the Senate approved the text without major changes in relation to the House text.

The new framework is less bad than the demoralized Spending Ceiling Law, but reproduces its general meaning: to shield austerity against popular vote and, in the future, replace the public offer of services by private sale, legally establishing a form of State neoliberalism that imposes narrow objectives and limits on the actions of governments against the preferences of their voters. The pretext is to stabilize the gross public debt/Gross Domestic Product (GDP) ratio without waiting for GDP to grow at high and sustainable rates, but rather by controlling public spending regardless of the economic situation.

The argument is that the containment of primary spending – without including or limiting public debt interest expenses – should contribute to the generation of primary fiscal surpluses as a way of stabilizing the public debt/GDP ratio, targeting the numerator of the ratio and not the denominator. . The sacrifice of demands met by public spending and the negative impact on economic growth would supposedly be offset by increased credibility about the public debt and business confidence in the future, and by the reduction of basic interest rates by the Central Bank, stimulating the economy through spending private.

Stabilizing GDP growth by stimulating demand – the Keynesian priority – and further reducing inequalities through social spending – the social democratic priority – are practically abandoned as objectives of fiscal policy, in the name of the neoliberal priority of stabilizing the public debt ratio. /GDP by controlling public spending. An eventual increase in the tax burden would not lead to a proportional increase in public spending, but in the primary surplus, prioritizing the aforementioned stabilization of the public debt/GDP ratio.

The proposal of a “fiscalist” tax regime as a substitute for the spending cap may seem an enigma, considering that the ideological debate of the Workers' Party has turned against austerity at least since Joaquim Levy's failed experiment in 2015, as manifested in the programs of the PT and its presidential candidates, including in 2022. Since then, the PT has systematically criticized the recessive and concentrating economic impact of fiscal austerity. Academically, this criticism is correct, as the fight against inequalities has historically depended on public spending. Moreover, several studies show that fiscal austerity reduces the GDP growth rate in any term, and that more “austere” countries have lower economic growth.[I]

In view of the recessive and income-concentrating economic impact of the fiscal framework, a political economy question is in order. As a government elected with promises of growth in employment, public investment and social spending, and with strong criticism of the neoliberalism inherent in the Spending Ceiling, ended up proposing a very restrictive fiscal framework and, without public resistance to the rapporteur's replacement, recommending the vote of your parliamentary base in an even more restrictive framework?

1. The proposed fiscal framework and its worsening in the Chamber of Deputies

As I already wrote in April (Bastos, 2023), the initial version of the fiscal framework already jeopardized economic growth, the social agenda of the Lula government (such as the real growth rule for the minimum wage), the laws that provide for an increase in public spending on health and education, not to mention cross-cutting investments required by climate change. After all, social security, education and public health expenditures have a very significant weight in the federal budget and tend to grow at least at the same rate as tax revenues, crushing other expenditures if all of them can only grow at a rate of at least 30%. lower than revenue growth.

Nor is the framework countercyclical at a time of economic slowdown, as public spending does not compensate for the slowdown in private demand but accompanies it, generating a downward spiral whenever GDP slows down from 3,57% to 0,86%. The fact that the minimum floor for expenditure growth is 0,6% pa is insufficient to prevent pro-cyclicality, as a cyclical slowdown does not only start when GDP grows below 0,86% pa

All of this could trap the economy in a spiral of low growth and expand the distributional conflict between beneficiaries of public budget items, weakening President Lula's popularity, the unity of the social coalition that elected him and the stability of the political coalition that supports him in the National Congress. All this became more likely with the approval of the law in the Chamber of Deputies:

1. The proposed framework already implicitly determined that public spending would grow below economic growth, reducing the size of the State in GDP as primary public expenditure grew by a maximum of 70% of the change in tax revenue (unless the tax burden increased year on year), as illustrated in the graph below:

“Assuming GDP and tax collection growth oscillating between 0,86% and 3,57%, public expenditure at the maximum authorized, and reaching the center of the primary result target, the simulation indicates that the State’s share in GDP goes from 33% in 2023 to up to 30% in 2030, reaching up to 25% in 2050, with corresponding growth in the private sector to reach up to 75% of GDP.” (Bastos, 2023, p. 8).  

Reducing the weight of public expenditure in GDP is, in fact, an objective of similar spending rules in the rest of the world, as recognized in a publication by the IMF staff (Cordes et al., 2015, p. 15-6). Although this was the general logic of the proposal, it could be changed by the Bill of Budgetary Guidelines (PLDO) forwarded at the beginning of each government, allowing for modulation at each election. This ended up in the Substitute Project (PS) approved by the Chamber. The limit for the growth of primary public expenditure (excluding interest payments), set at 70% of the variation in tax revenue in the original proposal until 2027, was included in the Complementary Bill as a permanent feature of the RFS, constitutionalizing austerity regardless of the preferences of each government.

Graph 1: the reduction of the State (2023-2050)

Source: Bastos (2023).

2. A forecast was included for the definition of four-year primary surplus targets, in the LDO of the first year of each government, which generate an ill-defined stabilization of the gross debt of the general government, also constitutionalizing austerity. Remembering, the proposed fiscal targets eliminate the primary deficit in 2024, generating a primary surplus of 0,5% of GDP in 2025 and 1,0% in 2026. If the fiscal targets defined for Lula's government are not met or, even if fulfilled, they do not reduce the gross debt/GDP ratio (due to low GDP growth), the new legal determination is that the fiscal surplus targets become even more restrictive in the next government, and so on.

3. The tolerance intervals for the fiscal result in relation to the surplus targets remained at 0,25 pp of GDP, but were made permanent by the RFS – instead of proposed in LDO by each elected government.

4. In the case of a fiscal result lower than the lower limit of the surplus target, the expenditure growth forecast is maintained at a rate 50% lower than the revenue growth rate in the previous year, but with new penalties: in the first year, it is prohibited to create a position, job or function, or change a career structure that implies an increase in expenses; create or increase aid, mandatory expenses and tax incentives. In the second year, the public service is jeopardized with a ban on salary increases and readjustments, admission of personnel and public tenders.

5. As if the reduction in the growth rate of expenditures to 50% of the growth rate of revenues was not enough as a recessive mechanism in the event of a fiscal result below the target floor, the determination of the Fiscal Responsibility Law (LRF) that the framework eliminated: the obligation to cut expenditures bimonthly in case the reduction of revenues or their bimonthly growth rate is incompatible with achieving the annual primary surplus target. This, evidently, reinforces the pro-cyclical nature of public spending in a cyclical slowdown in private demand that has a negative impact on tax collection.

6. Fiscal policy is once again criminalised: non-compliance with the lower limit of the fiscal target will not be a violation of the LRF as long as the public agent has taken initiatives to cut spending every two months in view of the reduction in revenues or their growth rate in the bimonthly reports. In other words, the Treasury will need to make pro-cyclical cuts in spending at the “mouth of cash”, bimonthly, in the event of a slowdown or drop in revenue. Thus, the radius of maneuver to carry out a countercyclical policy, or to signal austerity “for the English to see” and eventually negotiate an authorization for a worsening of the fiscal result in the case, for example, of a cyclical slowdown that negatively impacts tax collection .

7. In addition to maintaining the inclusion of capital contributions to financial state-owned companies in the expenses computed in the expenditure ceiling (an obvious sign of political demands from the financial market and the Central Bank), the Substitutivo started to include non-financial state-owned companies, expanding the anti-development bias of the fiscal framework.

8. Faced with the warning made by economists (such as Bastos, 2023, p. 14-5) that the evolution of tax collection up to June 2023 could determine low growth in expenditure in 2024, keeping the economy in a low-growth environment, the Ministry of Treasury belatedly included in the legislative proposal an authorization to spend according to the 2,5% spending growth ceiling in 2024. Furthermore, it suggested calculating the inflation that corrects the annual spending ceiling in 2024 (the amount spent in 2023 plus 2,5 % at best), due to inflation between January and December 2023 (and not between July 2022 and June 2023), estimating to expand the authorization to spend between R$32 and 40 billion in 2024. However, the rapporteur refused and determined that the limit of 70% of revenue variation in 2024 is already respected, except that the increase in revenue verified throughout 2024 is exceptionally high to the point of allowing the opening of an extraordinary credit for public spending in 2024. The rapporteur reinstated the inflation calculation period until June 2023 that had circulated in the first government proposals, but allowed that, in early 2024, the spending ceiling for 2024 be recalculated if the inflation effectively verified in twelve months until December 2023 is higher than that verified until June 2023.

9. Expenses that had been removed from the calculation of the spending ceiling were incorporated by the Chamber, such as transfers from the Union to complement the payment of the nursing salary floor and to the Constitutional Fund of the Federal District (FCDF), and payment for the services of water and sanitation agencies. In the case of the Fund for the Maintenance and Development of Basic Education and the Valorization of Education Professionals (Fundeb), formed by 20% of a set of state and municipal revenues (such as ICMS), the Union had a prior obligation to increase its contribution by 2 pp per year, from 17% of Fundeb in 2023 to 23% in 2026. In the substitute approved by the Chamber, this increase in the Union supplementation installments was included in the calculation of expenses subject to the ceiling, but the value of these supplements would be increased year a year to the ceiling size. The rapporteur's technical argument is that expenses that have an impact on the primary fiscal result should not be excluded from the expenditure ceiling, even though an accounting maneuver allows for growth in spending by the union with Fundeb without affecting the overall expenditure ceiling (although it may limit other expenses because it counts towards the primary outcome that must be achieved). The political objective is not to make exceptions that could increase over time.

In short, the changes promoted by the Speaker's Substitute in the Chamber of Deputies accentuated the general meaning of the neoliberal rule self-imposed by the Treasury: to constitutionalize austerity, removing from elected governments much of the power to decide on public policies, a process that many authors have documented occurring throughout of time and space (Biebricher, 2015, 2017, 2019; Bruff; Tansel, 2019; Cornelissen, 2017; Slobodian, 2018; Streeck, 2014).

 In the review carried out by the Senate, approved on June 21, the rapporteur Omar Aziz responded to the government's demands to remove from the calculation of the global ceiling of authorized expenses the Union's complements for Fundeb and the Constitutional Fund of the DF. It is important to make it clear that the government's objective is not to open expenditure authorization for other items in 2024, as Fundeb and FCDF resources spent in 2023 are also taken from the initial base on which the expenditure authorization for 2024 is calculated (the 2023 value plus 2,5% at best). The objective is to prevent the future increase in Union spending on Fundeb (depending on the variation in state and municipal revenues) and FCDF (corrected by the 100% variation in the Union's net current revenue) from putting pressure on other expenses after 2024.

Furthermore, the Senate removed science and technology spending from the spending cap at the request of Senator Renan Calheiros, apparently surprising the government according to press reports. This also does not release extra expenses for other expenses in 2024, since the amount spent in 2023 is also removed from the initial base on which the authorization of expenses for 2024 is calculated. Finally, Senator Aziz determined the calculation of inflation between January and December 2023 (and not between July 2022 and June 2023) to correct the nominal amount of expenditures in 2024, estimating to expand the authorization to spend between R$32 and 40 billion in 2024.

It is not known which of these revisions will be maintained in the Chamber, since the rapporteur, Deputy Claudio Cajado, stated that the revisions do not have a solid technical basis, and that his preference is to revert everything. In any case, even if the fiscal framework authorizes spending close to the ceiling of 2,5% real growth in 2024, the primary fiscal surplus rule self-imposed by the Treasury (zeroing the primary deficit) does not.

 The problem is that for spending to increase by 2,5% in 2024 – a significant slowdown compared to 2023 and 2022 – without making reaching zero primary deficit impossible, tax revenue must grow at exceptional rates in 2024, regardless of the estimate of revenue at the end of 2023. In fact, after the approval of the Substitutive of the Chamber, the Secretary of the Treasury has already admitted that 2024 will be a difficult year for the management of the public accounts due to the commitment to zero the primary deficit, unless the collection grows more than 4 or 5% above inflation (Tomazelli, 2023a), or 6 or 7% as stated two days later (Ventura, 2023). Calculations by Felipe Salto indicate the need for revenue growth of 9,7%, or R$ 120 billion (Tomazelli, 2023b). Minister Simone Tebet talks about even more: R$ 150 billion (Monteiro, 2023).

Also after the approval of the Substitutive of the Chamber, the Secretary of the Treasury affirmed that the government really thinks of proposing a law in 2023 so that the expenses with health and education do not grow to 100% of the growth of the revenues (Ventura, 2023) without acknowledging that the The objective is to reduce the austere pressure against other expenses subject to the ceiling of 70% of revenue growth.

As for the recessive impact of the RFS, I will not repeat in detail the arguments already presented in Bastos (2023), referring the interested reader to that text. It is enough to remember that the targets for expansion of public spending are much smaller than what was verified during the New Republic, except during the time of the Spending Ceiling, even though spending always grows within the limit of 2,5% pa AND that, in order for the GDP does not decelerate under the weight of primary public expenditure that grows at 70% of the evolution of revenues (assuming stability in the tax burden), private expenditure (including net exports) should grow at a rate 64% higher than public expenditure, something that never occurred since 1930 for a long term.  

Anyway, even if the difficult crossing of 2024 is made without major mishaps, the scenario is not rosy except that the government accumulates power and will to modify a self-imposed neoliberal rule. Could it be different? That's what we'll discuss next.

2. The convergence of ideological forces between the Ministry of Finance and the Central Bank in defense of fiscal austerity

What ideological framework justified the fiscal framework? As ever, the case for neoliberal sacrifices of democratic promises and hopes is a version of Margaret Thatcher's catchphrase: "There is no alternative" (TINA). This naturalizes austerity, an essential ideological device for neoliberal hegemony, its control over the agenda and over the non-agenda of public policies, for “capitalist realism” (Fisher, 2009) and for the “disimagination” typical of neoliberalism ( Giroux, 2014). Before answering whether there was an alternative or not, it is necessary to ask: did the Ministry of Finance want an alternative?

Apparently no. There are indications in practice and in rhetoric that Minister Fernando Haddad believes in the argument that economic growth can be led by private spending despite fiscal austerity, as austerity would be a condition for reducing interest rates and for the resumption of business confidence in the future of the economy, supposedly shaken by distrust over the presumably explosive trajectory of the public debt.

In his first interview about the economic model imagined for the government after the elections, in December 2022, Minister Fernando Haddad ruled out the option of fiscal expansion to stimulate the economy, making fiscal contraction a condition for the reduction of basic interest rates to stimulate the growth:

“We are not at a time when fiscal expansion will help the economy… If there is room for stimulus, it would be monetary. If we know how to make the transition, there is room for a lower interest rate. You have to give security to the monetary authority... If we restructure this liability, signal sustainability, you combine the two policies [fiscal and monetary], bring this interest rate to a level that it could already be. And the sooner we do that, the sooner we will reap the rewards of the right decision… In my opinion, if this is presented well, there is room in monetary policy to bring about growth.”[ii]

In January 2023, the Executive Secretary of the Treasury, Gabriel Galípolo, repeated a similar argument, with one difference: the veto to the expansionist fiscal policy would not come only from the Central Bank, but also from the private financial market. A sign of the government's lack of commitment to containing the trajectory of the public debt through fiscal moderation could stimulate financial market expectations that lead to capital flight, exchange rate depreciation and the resulting inflationary shock. Containing these expectations by signaling fiscal contraction (that is, the proportion of public spending in GDP), the Ministry of Finance should open “fiscal space” for the Central Bank to reduce the basic interest rate without jeopardizing the value of the Real in the foreign exchange markets. In Gallipolo's words:

“… what Minister Fernando Haddad has repeated… is that there is no fiscal policy and monetary policy, there is economic policy… The great challenge that is being posed by Minister Fernando Haddad is how can we produce signs where these two policies are going walk in the same direction... as the Minister has been doing since the beginning with the announcement of measures so that you can, on the one hand, present sustainability in public accounts, create space for the Central Bank to see that there is a scenario for reducing fees…".[iii]

It is noteworthy that the argument of the Ministry of Finance is the same as that of the conservative president of the Central Bank, Roberto Campos Neto. The minutes of the Monetary Policy Committee (Copom) consistently state that fiscal policy must be contractionary to help the Central Bank reduce interest rates. As the Copom admits that the economy is slowing down at the same time, there is no demand inflation that deficit public spending could worsen. Therefore, the hypothesis remains that inflation would be determined by the expectation of default on the public debt and, in the future, by the “possible adoption of expansionist parafiscal policies” (a typical reference to the expansion of credit by public banks):

“When evaluating the factors that could lead to the materialization of an alternative scenario characterized by a higher neutral interest rate, the possible adoption of expansionist quasi-fiscal policies was emphasized… The Committee assesses that the commitment to the execution of the fiscal package demonstrated by the Ministry of Treasury, and already identified in fiscal statistics and fuel re-encumbrance, mitigates fiscal stimuli on demand, reducing the risk of high inflation in the short term. Furthermore, the Committee will continue to monitor the design, processing and implementation of the fiscal framework that will be presented by the Government and voted on by Congress. Copom emphasized that there is no mechanical relationship between inflation convergence and the presentation of the fiscal framework, since the former remains conditional on the reaction of inflation expectations, public debt projections and asset prices. However, the Committee points out that the materialization of a scenario with a solid and credible fiscal framework can lead to a more benign disinflationary process through its effect on the expectations channel, by reducing inflation expectations, uncertainty in the economy and the premium of risk associated with domestic assets… Among the upside risks to the inflationary scenario and inflation expectations, we highlight… the uncertainty about the fiscal framework and its impacts on expectations for the trajectory of the public debt” (Copom, 2023) .

The Copom does not explain why the supposed expectation of public debt default brought about by an expansionist fiscal policy – ​​even more so in a context of cyclical deceleration – would lead to an increase in inflation now: by chance, agents would be fleeing public bonds towards to real assets or to the dollar when calculating the long-term path for the public debt/GDP ratio in the coming decades? And do they do so assuming that the fiscal contraction only affects the path of the debt/GDP ratio positively through the numerator (via the primary fiscal surplus), without affecting the denominator, that is, GDP growth? If the answer is positive, this is undoubtedly an example of the argument in favor of expansionist fiscal contraction, or the “credibility fairy”, already scientifically refuted.

 In BC documents, the “evidence” presented regarding the possibility of a flight against public bonds is just the record of pro-austerity expectations and opinions of the financial market. Based on them, fiscal policy is required to be contractionary as a condition for reducing basic interest rates (although the interest differential in favor of Brazilian government bonds greatly exceeds risk premiums in international markets). Academically outdated, the president of the BC implied that GDP growth does not depend on fiscal expansion, and that even the reduction in interest rates that fiscal contraction could allow would also need to be complemented by new institutional reforms that, presumably, allow the private sector to lead the economy forward.[iv]

Thus, the BC president's argument defends a form of coordination between monetary and fiscal policy that, first, vetoes an expansionist fiscal policy and, second, alleges that the reduction in interest rates supposedly made possible by the fiscal contraction must be complemented by institutional reforms. that unlock the growth potential of the private sector. This is the neoliberal argument for the right macroeconomic mix since the fiscal contraction experiment with Margaret Thatcher, already justified with rational expectations models that rationalize the “fairy of confidence” (Quiggin, 2011, ch. 3).

The theoretical and ideological position of the Ministry of Finance on the coordination mix between monetary and fiscal policy is strictly the same as the BC's neoliberal position, also academically outdated in terms of its expected economic impacts. The only difference is in the pace of implementation: Haddad claims that the Central Bank should rely on the good contractionary intentions of the fiscal framework and anticipate a more robust reduction in basic interest rates. However, Haddad accepts that the fiscal policy should support the monetary policy, that is, that it respects the fiscal conditions defined by the president of the autonomous Central Bank to lower short-term interest rates. In the long term, Haddad also accepts Campos' proposal of subordinating fiscal policy to the objective of stabilizing the path of public debt by contracting the proportion of public spending in GDP. In neoliberal fashion, he expects GDP to be boosted by the private sector in response to fiscal contraction, interest rate cuts and institutional reforms that encourage the channeling of private wealth pooled today in highly liquid government bonds for investments in the production of goods and services .

It is to be expected that, when the Lula government can nominate the new president of the BC, the pace of interest rate reduction will be accelerated, since the main candidate for the position, Gabriel Galípolo, has a history of criticizing neoliberalism, in fact more than Fernando Haddad. Furthermore, at the Treasury, Galípolo followed Haddad in criticizing Roberto Campos Neto's slowness in understanding the Treasury's signals for the BC to reduce interest rates. In any case, all three share the idea that fiscal contraction and the reduction of interest rates must be complemented by market-friendly institutional reforms. What would be the reforms envisioned by the Ministry of Finance?

There are basically two: a new framework for public-private partnerships (PPPs) and a tax reform that simplifies consumption taxes and exempts the manufacturing industry from agriculture and services. The discussion of both is beyond the scope of the article. In any case, was there an alternative to prioritizing the private sector as a growth axis for the Brazilian economy?

3. The relationship of political forces in the presentation and processing of the fiscal framework

If the theoretical position that condemns fiscal expansion as a means of stimulating demand is academically outdated, it seems politically up-to-date in the face of the ideological correlation of forces current in Brazil, strangely protected, at least in the corporate media, from the crisis of neoliberal dogmas in the rest of the country. West, not to mention the Asian developmental world. That said, with strong indications that Minister Haddad ideologically rejected less restrictive alternatives than the fiscal framework that he himself proposed to Congress, we can ask: was there a political alternative to austerity in the short term?

As always, it is not possible to counterfactually test the opposite of TINA, namely the viability of alternative futures, as they could not be observed in the specific historical conditions in which austerity was decided to adhere to. However, it is also not possible to argue that the position and conduct of the federal government does not matter in the outcome of the political and ideological struggle more or less favorable to austerity. After all, shortly before the beginning of the third Lula administration, the president-elect refused to adhere to the austerity provided for in the Spending Ceiling and in the 2023 budget project and used his political capital to approve the so-called Transition PEC, or Bolsa Família PEC. .

In the Jair Bolsonaro government's 2023 Budget bill, primary spending was expected to contract by 1,4% of GDP in 2023 (measured at R$150 billion), the smallest space for investment in history, of just 0,22% of GDP, and a primary deficit of R$65,9 billion. Lula's offensive against austerity involved mobilizing and influencing public opinion, showing the disaster that would be caused on social programs that enjoy broad popular support, contrary to the popular preferences democratically manifested in the elections that had just taken place. Lula also vehemently defended that social spending should be seen as an investment and not a waste, as is typical in the hegemonic neoliberal political discourse in the traditional media.

The political and ideological offensive had its effect. The initial proposal of the new economic team did not even involve eliminating the spending ceiling, but only authorizing the payment of the new Bolsa Família outside the Spending Ceiling, with the exception of R$ 175 billion from the budget. The Senate heeded Lula's criticisms and jointly abolished the spending cap. Constitutional Amendment 126 (resulting from the Transition PEC) also authorized an increase in expenditures of R$169 billion, while the authorized primary public deficit was increased to R$231,5 billion, estimated at 2,16% of GDP. In addition, spending with a high multiplier power – social and investment – ​​was increased by around 2% of GDP, raising investment to R$ 79 billion or around 0,75% of GDP, a historically low value, but much higher to the previous budget for 2023.

Publicly, Lula said he did not care about pressure from the financial market and its short-term effects – such as rising interest rates on long-term government bonds and currency devaluation – as such effects would be reversed quickly as speculators took advantage of low prices to to buy reais and public bonds again and, in a more sustainable way, as the economy recovers. On the contrary, it shifted pressure against the president of the independent Central Bank, Roberto Campos Neto, accusing him of setting interest rates in response to rentier interests without a basis in demand pressures on inflation, with unnecessary recessive effects to control inflation in an economy that I was already slowing down. Lula did not say so, but the international interest rate differential offered by the Central Bank also reduced the risk of exchange rate depreciation because it greatly exceeded the Brazil-risk premium (measured by EMBI+, the JPMorgan Emerging Market Bond Index). Predictably, the approval of the Transition PEC, contrary to the alarmism of the “market watchers” against the increase in public spending or the reduction of interest rates, did not bring any exchange rate depreciation or any spike in inflation.

All of this indicates the enormous power of defining the political agenda that the presidency of the Republic has in Brazil, especially after a consecrating election won by a great political communicator. Without the dispute over the meaning given to the public budget and its form of management, Lula's presidency would be born in love with the Spending Ceiling.

After taking office, however, Lula transferred the political and ideological initiative in the fiscal field to the neoliberal or social-liberal discourse of the Minister of Finance, Fernando Haddad, limiting himself to attacking the interest rate policy of the independent Central Bank. At that moment, the dispute over the direction of fiscal policy practically ended, as Minister Haddad adhered to the hegemonic neoliberal discourse that blamed excessive public spending on inflation and the risk of public debt default – promising, with the proposal of a tough rule of thumb control of public spending, help the Central Bank reduce interest rates and ensure that the financial market has confidence in the future to the point of investing productively and demanding risk-free government bonds, instead of running away from them and from the country. With the dispute over the meaning given to the public budget abandoned, Lula's presidency was not born bound by the Spending Ceiling, but would end up bound by the New Fiscal Framework and, even worse, by the Sustainable Fiscal Regime.

The reason for the decision to transfer the political and ideological initiative in the field of taxation to the neoliberal or social-liberal discourse of the Minister of Finance is unknown: was Lula convinced by Haddad's discourse that the new fiscal framework would not harm economic growth , and would it allow reconciling the resumption of public debt credibility before the financial market, on the right, and the payment of the social debt that was promised in the presidential campaign, on the left, combining the so-called fiscal and social responsibility?

Otherwise, let's assume that Lula recognizes the recessive impact of austerity. Did he believe that it was necessary to regain credibility with the financial market, as in the option for Palloci in 2003 and for Trabuco or Levy in 2015, before having time to plan to stimulate new public and private investments to accelerate growth? Or was there just a pessimistic, perhaps realistic, political calculation regarding the correlation of forces, that is, did Lula calculate that the successful offensive in November and December 2022 would not be as successful after the inauguration of the new National Congress in 2023 – perhaps the most conservative of the New Republic –, being necessary to back down and give in to business pressure in favor of austerity against public investment and social spending, despite the risk posed to the implementation of its campaign agenda? Did he imagine it necessary to prepare a successor to the presidency of the Republic, Fernando Haddad, capable of uniting the center-right and the center-left in a new long-term political coalition, extending over time the broad front that isolates the extreme right? Or, on the contrary, did he believe that there was no alternative to austerity in the short term, but tried to shield himself from the unpopular option by transferring it to Haddad, replaceable in case the bet fails in the medium term in an eventual developmental turn, as in 2005?

The choice of the preferred hypothesis or a combination of them is up to the reader. What can be said is that, regardless of the reason, the Ministry of Finance announced a significant retreat from the PEC proposal for the transition and the result of Constitutional Amendment 126 on January 12, 2023, before any negotiation with the National Congress , moreover, even before the inauguration of the elected congressmen. In other words, he gave in before negotiating.

The January 12 package announced an ambitious spending cut of R$50 billion (about 0,5% of GDP in January) to achieve, along with rising revenues, a primary fiscal surplus of at least 0,10 % of GDP already in 2023. Compared with the prediction of the transition PEC which, less than a month before, had bequeathed to the 2023 Budget a primary deficit estimated at R$ 231,5 billion or 2,16% of GDP, the January 2023 proposed to deliver a fiscal adjustment of around 2,26% of GDP in the midst of a slowing economy. At the same time, the minimum wage readjustment was postponed to May, to the point of practically eliminating even the recovery in accumulated inflation since the last readjustment in January 2022. In addition to contributing to the promised fiscal adjustment by reducing social security spending, the decision converged with the Central Bank's effort to contain inflation by reducing real wages.

If the Minister of Finance considered the cuts a political sacrifice imposed by the correlation of forces, this did not show, defending them as technically necessary for the Central Bank to reduce the interest rate, inducing private productive investments. Still in December 2022, as we saw, Haddad relaxed the pressure against the Central Bank made by President Lula, claiming that there was a technical condition, of a fiscal nature, for Roberto Campos Neto to reduce the interest rate, the control of public spending to signal a sustainable trajectory for the public debt.

On March 01, 2023, Haddad justified the re-encumbrance of fuel taxes by stating that the government would not have a project to become popular in six months, emphasizing that it is up to the Treasury to announce measures less “understandable” to Brazilians to allow the BC to reduce interest . He recalled that in his first term, in 2003, Lula also took tough measures, now justified as follows:

“I, as Minister of Finance, have to take compensatory measures to balance the game and allow and even count on the Central Bank to do its part and start restoring the balance of economic policy, with a view to sustainable growth… The goal ( of inflation) will not be what will make interest rates fall, what will make interest rates fall is for us to follow the January 12 plan” (Garcia, 2023).

On the same day, Minister Simone Tebet joined Haddad, claiming that:

“We are, indeed, focused now on cost containment. This is what we want to show the Copom and the Central Bank. They can, even if gradually, reduce interest rates, we have fiscal responsibility and we are doing our homework” (Holland, 2023).

As in a “homework”, the fiscal policy was presented as supporting the joint effort to technically allow the Central Bank to reduce interest rates. It may be that Haddad and Tebet really believe that Roberto Campos Neto does not simply want to discipline fiscal policy, but that he really believes in the neoliberal myth that blames excessive public spending on inflation and the risk of defaulting on the public debt. Or it could be that they don't believe that Campos Neto believes that, but that they need to negotiate with him so that he reduces interest rates through public “signalling” and effectively offering sacrifices in the form of fiscal austerity. In any case, it matters less what Haddad and Tebet really believe that Campos Neto really believes, and more the discourse and practice coming from the Ministries of Finance and Planning.

In the practice of the discourse and decisions of the economic team, the dispute over the direction of fiscal policy that had been started by Lula in November 2022 ended on January 12, 2023: Roberto Campos Neto won the dispute. Fiscal policy began to be seen, in a converging manner in the Central Bank and in the economic team of the Lula government, as a means of guaranteeing the sustainability of the public debt and combating inflation through fiscal contraction – the neoliberal priority –, and not as a means of expanding GDP through public investment and further reducing inequalities through social spending – the Keynesian and social democratic priorities.  

Once the dispute over the meaning given to the public budget and its management was concluded, and the neoliberal narrative repeated to exhaustion as the hegemonic discourse in the traditional media and propagated by Haddad, Tebet and Campos Neto victorious, it was predictable that the National Congress would make the fiscal framework more still restrictive. Provided, of course, that budget restrictions do not harm the imposing parliamentary amendments that channel resources to regional and municipal bases of deputies and senators to the detriment of the priorities of federal investment and universalizing social spending of the Executive Branch. Incidentally, the Ministry of Finance determined to speed up the vote on the fiscal framework long before the August 31 deadline and before adjustments in the ministerial composition and in the distribution of amendments and positions for parliamentarians ensured a more stable majority for the government's legislative projects.

Faced with the political and ideological convergence of the Ministries of Finance and Planning, the Central Bank and the corporate media that reverberates the opinion of representatives of the financial market, opposition to neoliberalism could only be left with the tactic of containing damage. However, divergent and combative voices against neoliberalism, but loyal to President Lula, were silenced with the public and exemplary punishment suffered by deputy Lindbergh Farias, who lost his intended seat in the CPI of the neo-fascist coup of January 08th. The PT leader's orientation in Congress overcame the resistance of the PT presidency (and a significant part of the militancy and intelligentsia linked to the party), preventing the presentation of amendments that resisted the neoliberal steamroller. With that, the correlation of forces became even more unbalanced so that only one side – the one that wants to tie down, if not even sabotage the third Lula administration – operated to make the new fiscal framework even more restrictive.

4. Final considerations

The risk of emptying the debate on fiscal policy and refusing to educate the militant base and the population in general about the risks of austerity is not just that of leaving the field free for neoliberal attacks on the social rights of the 1988 Constitution. , which will certainly be present soon in the discussion of minimum floors for public spending on education and health. The risk is that the dissatisfactions brought about by neoliberalism and austerity are not channeled against their causes, but rather, by the active right in social networks and in the traditional media, against the usual scapegoats: corruption, incompetence and “identitarianism” inherent in to a swollen “globalist” and “patrimonialist” State. We've seen this movie before.

In the future, if the RFS proves to be incompatible, as is likely, with Lula's campaign promises – such as the rule for a real increase in the minimum wage – and with the forecast of increased expenditures on health and education, with what political and ideological basis Will the government count in forcing a change in the fiscal framework? How will he turn against his own creature, if he even regretted the deepening of fiscal restrictions promoted by the rapporteur's replacement? Faced with the impasse, will he embrace the RFS and abandon electoral commitments, running the risk of a historic political and electoral defeat in 2026? Or will Lula and/or Haddad find ways to turn the fiscal framework to the left at the right moment, taking advantage of some unpredictable opportunity now? Will such a shift to the left rely solely on traditional parliamentary negotiations or will it require popular mobilization?

It is not possible to conclusively answer such questions. Faced with the lost opportunity to attack a broken pillar of neoliberalism – the austerity inherent in the Spending Ceiling – and replace it with a Keynesian and social democratic pillar, we can only resist the conservative solution to each impasse resulting from the implementation of the RFS, to prevent the emptying the debate on the risks and damages of austerity, hope that the fascist threat is neutralized by the Judiciary and a moderate growth in employment and income, and wait for another opportunity to unlock the economic potential of the Brazilian people.


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[I] Perotti, R. (2012); Fatás, A., & Summers, LH (2018); Breuer, C. (2019).

[ii] Interview with Estúdio i, 14/12/2022 (Haddad, 2022).

[iii] Interview with CBN, 25/01/2023 (Galípolo, 2023).

[iv] In the words of Campos Neto at the closing BC seminar on May 19, 2023: “We spend a lot of time discussing whether the Selic rate is high or low and what we have to do. It's our job. But when we look beyond that, we need to focus on the fact that we must carry out structural reforms, which reduce the neutral interest rate and increase structural growth” (Pinto, 2023).

*Pedro Paulo Zahluth Bastos He is a professor at the Institute of Economics at Unicamp..

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