By PAULO NOGUEIRA BATISTA JR.*
We must overcome the resistance of the national plutocracy, which controls Congress and the corporate media.
1.
Since the end of November 2024, the Brazilian economy has been experiencing intense financial and exchange rate instability. It was the worst moment for the economy under Lula's government. The markets have calmed down at the beginning of this year, but the exchange rate remains above 6 reais per dollar, with an adverse impact on the inflation rate and interest rates.
What to do? I will review some alternatives, without claiming to exhaust the subject or even to do justice to the possibilities that will be raised.
There are two types of measures: the more conventional and the less routine. The most natural thing would be to start with the conventional ones. The government is already taking or planning some measures of this type.
With regard to fiscal policy, it is advisable, first of all, to take additional adjustment measures to dispel still predominantly negative perceptions about public finances. Additional measures would reduce the government's financing needs and its dependence on the financial market. At the same time, it would be necessary to confirm that the increase in the income tax exemption bracket will be fully offset by the increase in effective tax rates for high-income taxpayers, specifying in what ways they would be required to contribute more.
Another important point would be to strengthen Minister Fernando Haddad's position within the government. In recent months, suspicions have spread that he is weakened, which has contributed to the financial turmoil and the depreciation of the real. If President Lula acts to dispel this suspicion, it will be easier to calm the market and form positive expectations regarding fiscal policy.
Readers, we must not forget that in any government all ministers want to spend, except one, the Finance Minister, who wants to save money. That is why he is the only one who can never be “fried”. But, on second thought, this observation may be superfluous, since the President of the Republic, in his third term, is a highly experienced political leader.
In any case, the government must bear in mind that fiscal adjustment always and everywhere involves a distributive conflict. In other words, it involves choosing who will be burdened by spending cuts or tax increases. Since Brazil has a high degree of income and wealth concentration, the adjustment must be progressive or, at the very least, neutral in terms of distribution. This means that not only income tax, but also spending cuts, including exemptions and incentives, must target mainly high-income sectors. In short, the adjustment must be compatible with the motto used by Lula in the election campaign – “put the poor in the budget; and the rich in the income tax”.
2.
This is easier said than done, as we know. But a promise is a promise. Especially since interest rates will remain high in 2025, contributing to the concentration of national income. If fiscal policy is also unfair, the Lula government will promote income concentration in two ways, through fiscal policy and monetary policy, in flagrant conflict with its social base and campaign rhetoric.
Again, it is highly unlikely that President Lula would be willing to commit such electoral fraud. Experienced as he is, he certainly knows that electoral fraud is usually severely punished in Brazil – Fernando Henrique Cardoso, to mention just one example, never recovered politically from the 1998 fraud.
Of course, admitting that interest rates will remain high during 2025 does not mean assuming that they cannot be reduced at some point, say, from the second quarter onwards. If fiscal policy follows the path mentioned above and the position of the Finance Minister is strengthened, the Central Bank will have the opportunity, which it should not miss, to gradually lower the interest rate.
And it is not only fiscal policy that can contribute to lower interest rates. The Central Bank does not always use, as it could, all the instruments at its disposal to induce a fall in the dollar and lower interest rates. Some are traditional, such as selling swaps exchange rates or use international reserves for specific interventions in the spot exchange market.
Despite the loss of about $30 billion at the end of last year, reserves remain high and can be tapped to quell currency turbulence. And the sale of swaps It is a way of offering foreign exchange hedging and defending the real without spending reserves, assuming obligations denominated in national currency.
Other instruments are more innovative when compared to the Brazilian experience of recent decades. I will mention three of them in brief. All of them have their risks, but they may be recommended, especially if there are new episodes of turbulence.
First instrument: authorize the Central Bank to operate, when appropriate, along the interest rate curve, influencing long-term rates, as some of the main central banks do, including the US.
Second: reintroduce capital controls, modernized to apply to derivatives, which currently account for the majority of market transactions. The Central Bank and the Federal Revenue Service would work together to regulate and monitor the remittances of capital abroad by the rich and super-rich. For this and other purposes, the Revenue Service should recreate a unit dedicated to large taxpayers.
Third: the Central Bank and the Treasury could explore the possibility of raising external resources from government sources, in a significant amount and under more favorable terms and conditions than those of the domestic market. These resources would have to be used exclusively to replace part of the domestic debt with foreign debt, and not to finance an increase in the fiscal deficit or the accumulation of international reserves. This would improve the profile of the public debt, increase its stability and the government would be less dependent on domestic financing.
3.
In short, if fiscal policy is strengthened, if the Central Bank contributes, in turn, to the appreciation of the real and the fall in interest rates, and if it is also possible to negotiate external financing with new sources, the government would be able to stabilize the financial and exchange markets and resume the successful economic trajectory of 2023 and 2024.
One final caveat. Some of the above measures, especially the unconventional ones, would encounter resistance from the national plutocracy, which controls Congress and the corporate media. To adopt them, the government would have to be well prepared from a technical standpoint and willing to go against powerful interests.
Difficult, without a doubt. But isn't it always difficult to govern fairly, with the people's interests in mind? And wasn't that exactly why Lula was elected?
*Paulo Nogueira Batista Jr. is an economist. He was vice-president of the New Development Bank, established by the BRICS. Author of, among other books, Estilhaços (Contracorrente) [https://amzn.to/3ZulvOz]
Extended version of article published in the journal Capital letter, on January 17, 2025.
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