Spending cap – a sabotage mechanism

Image: Lucas Vinícius Pontes
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By ANDRÉ SINGER & FERNANDO RUGITSKY*

The alternative of replacing the current rule with some attenuated austerity, making it impossible for the public power to act in the short term, would represent more of the same

A controversy that had been brewing for some time gained momentum with the preview of former president Lula's government plan sent to the six parties allied to the PT. From it, PSB, PC do B, PV, PSOL, Rede e Solidariedade will have to pronounce on the proposal to revoke the spending ceiling, which would be, according to the document, the way to “replace the poor and workers in the Budget ”.

Anticipating the opinion of the allied associations, the stock market fell and the dollar rose due to the leak of PT guidelines, reacting to what the market calls “increased fiscal risk”. The confrontation between the social need for public spending and the mistrust that this causes to private investors will constitute the center of the democratic crossroads in the likely third Lula mandate.

In mid-April, the newspaper Financial Times, one of the bibles of international capitalists, had summarized the disagreement. Reporting by Bryan Harris, correspondent for the English newspaper in São Paulo, summarized the duel between PT formulators and economists linked to the financial markets. In it, speaking for the PT, Guilherme Mello, a professor at Unicamp, defended the replacement of the expenditure ceiling by fiscal rules compatible with the investment needs of the Brazilian State. The ceiling generated “more poverty, more misery, more inflation and more hunger,” said Guilherme.

Defending the colors of money, Sergio Vale, chief economist at MB Associados, argued that increasing public and social investment, without a strong adjustment in the rest of the Budget, would worsen the national economic situation. "Abolishing the cap would only be good if there was a better rule," said Sergio, "but that doesn't seem likely."

Due to a combination of factors, the divergence around state spending is key. Winning the election and overcoming Bolsonaro's coup threats and supporters will not be easy and will require unity and redoubled strategic capacity from the democratic forces. Multiple and dangerous obstacles will need to be overcome in the next four months.

The challenges, however, are far from ending in the desired peaceful possession of the winner. The dispute over the direction of economic policy, rooted in different class perspectives, poses a dilemma for the young and unstable Brazilian democracy.

The crux lies in the fate of Constitutional Amendment (EC) 95, which draconianly limited public spending until 2036 (with an intermediate review scheduled for 2026). As you remember, enacted by the National Congress in 2016, during Michel Temer's consulate, the so-called ceiling amendment was one of the structural consequences of Dilma Rousseff's (PT) impeachment.

Main item of the booklet Uma Ponte para o Futuro, MDB's official program for the parliamentary coup that overthrew the president, the amendment blocked for at least two decades any attempt to put Brazil back on the path of development. Together with the labor and social security reforms (leveraged by the current president), they represented, in practice, a stepping stone to the abyss.

Bolsonaro, who symbolizes the bottomless pit into which we have fallen, adduced the autonomy of the Central Bank as his own contribution to salting the earth so that developmentalism would never again dare raise its head here.

Of the four sacred laws of delay, however, that of the ceiling is the cornerstone. Often described as a mere instrument to contain the supposedly explosive increase in public spending, forcing a discussion of priorities, it is much more than it appears.

In fact, the regulation paralyzes, in real terms, the amount of resources that the Executive can commit, deviating from the strictest rules imposed on nations attacked by austeritis. The freeze means that, if the economy grows, the percentage of GDP that will be allocated to the Budget will fall, as it will remain stagnant within the limits of 2016, and should only be readjusted by inflation.

Estimates by Esther Dweck, professor at the Federal University of Rio de Janeiro, published in the book post-pandemic economy, suggest that primary spending (that is, discounting public debt interest payments) threatens to fall from around 20% of GDP in 2017 to just over 13% in 2036. SUS, federal universities and many other institutions that aim to guarantee the rights enshrined in the 1988 Charter.

However, EC 95 is not restricted to reducing the size of the State. It has a prominent short-term macroeconomic effect. By compressing public spending, one of the main engines of growth in contemporary capitalism starts to function as a brake, which constantly slows down GDP, making it difficult to create jobs and increase worker income.

Calculations by the Independent Fiscal Institution of the Senate indicate that, between 2017 and 2019, in the initial triennium of the EC and before the shock caused by the pandemic, fiscal management reduced GDP growth, while between 2003 and 2014 it accelerated it.

In 2020, the ceiling was relaxed due to Covid-19, and fiscal policy temporarily assumed an expansionist character. In 2021, however, the blockade manifested itself again. In short, respecting the established neoliberal limitation, the economy will tend to walk sideways, without producing the jobs and wages that are indispensable to consolidate the democratic option that, according to polls, the majority of the electorate should make in the next election.

 

Against austerity and autocratism

The arid fiscal debate therefore acquired political centrality, with government spending starting to assume a prominent place among the weapons chosen to combat the rise of the extreme right. In the United States, for example, Joe Biden proposed a bold and important set of plans to rebuild the country once he took office.

Perspicacious, Joe Biden, a notoriously conventional cadre, put people who criticized austerity on the economic team. He wanted to signal the urgency of the measures that needed to be taken. His agenda foresaw no less than $7 trillion to be invested by the State. It was so advanced that it was seen, in the opening months, as the end of neoliberalism. “Market fundamentalism . . . is being replaced by something very different,” wrote Dani Rodrik, Harvard professor laureate.

The current US president did so because he realized that it was not the survival of the Clintonian machine that was at stake, but that of the democratic regime. Analogously, in Brazil, it is not the future of Lulism, but the foundations of democracy that are in question.

The economic translation to be given to the vote of confidence that the Lula-Alckmin ticket will receive in October needs to respond to the emergency demands of the popular sectors. It is likely that neoliberalism has not ended, but the nature of the clash has changed with the entry of fascist components into the scene, demanding a bold stance from those who bet on the democratic regime.

In the US, the resistance that some of the measures proposed by Biden face from conservative sectors have restricted the impact of the proposed political shift, compromising the overcoming of Trump's legacy. The part already in execution allowed the resumption of economic activity, the creation of jobs and even a certain strengthening of some sectors of the working class.

However, blocking the call American Families Plan, which would potentially have more structural and lasting effects, has contributed to the survival of Trumpism, which may prevail in the elections next November. The North American case teaches that, if the world's democrats are not able to quickly deliver what they promised, autocratism tends to intensify.

The post-factual extreme right, to use an expression by Wolfgang Streeck, who was born with Brexit in 2016 and spread to the world through the hands of Donald Trump and Steve Bannon, is here to stay, as revealed by the recent competitiveness of José's candidacies Antonio Kast, in Chile, and Rodolfo Hernández, in Colombia. If democratic coalitions do not produce effective social measures, they will end up without instruments to prove to the popular sectors that the democratic game is worthwhile, fertilizing the soil from which authoritarianism springs.

 

Contradictions of the conjuncture

The external situation presents contradictory elements. In the global economy, uncertainty prevails about the medium-term consequences of the war in Ukraine and about the speed of recomposition of supply chains, still shaken by the pandemic.

It is plausible that the continuation of the inflationary escalation in rich nations reduces global liquidity and worsens the Brazilian situation, with an eventual currency devaluation, pushing the Central Bank to raise interest rates even more and, consequently, retain growth.

One should not exclude, however, the possibility of favorable winds blowing in 2023, if world inflation subsides, driven by the prices of manufactured products, and commodities exported by Brazil continue to rise.

It is worth remembering that, in the first four months of 2022, there was a boom in commodities the like of which had not happened for half a century, as indicated by economists Bráulio Borges and Ricardo Barboza. From this point of view, therefore, it is possible that the country finds itself, coincidentally, in a situation similar to that which allowed the rise of Lulism.

However, on that occasion, the boom in exports increased revenues and made it possible to accelerate growth and job creation without reducing the primary surplus. That is, it was feasible to expand the State's action because there was more money entering the Treasury coffers, without increasing the debt.

With amendment 95, however, even with an eventual increase in revenues, the amount available for use will remain limited, as the fiscal regime isolates the economy from any positive impulses coming from abroad. Deep down, let's be clear, the ceiling was created to prevent another Lula “miracle” from taking place under favorable circumstances. At the same time, it removes instruments from the Executive to deal with negative impulses coming from outside. Eventual bonanzas are despised, while storms are welcomed with open arms.

If the commodities boom cannot be taken advantage of, and the global turmoil cannot be fought, the long-awaited improvements, with which Lula is identified, become unfeasible. The political effect was not to be expected: the democratic alternative would face weakened Bolsonarism in our “mid-term elections”, the municipal elections of 2024.

 

The political cycle of the economy

Domestically, pressure to cut spending tends to increase, as happens in a presidential election year. Take, for example, the subsidy of up to R$ 46 billion for the consumption of fuel, electricity, communications and transport.

Even the stones know that it is one more of the measures aimed at favoring Bolsonaro’s performance in the electronic voting machines (which he, incidentally, despises), such as the Auxílio Brasil, the release of the FGTS, the amnesty of the Fies, among others. With each one, the cry in favor of a corresponding cut in State expenses grows.

After all, for capitalists, the stability of public accounts comes before any political or social considerations. According to Lula, the bankers and businessmen with whom he meets only want to know about fiscal responsibility, asking whether or not he "will maintain the spending ceiling".

In effect, the mantra of budgetary balance, whose inviolability, incidentally, was the center of the historical preaching of several characters now considered to formulate the definitive program of the democratic ticket, appears again at the heart of the assessment of market figures.

Under the rubric of “fiscal consolidation”, the defense of the ceiling works like blackmail: if guarantees are not given, capital will get nervous and leave. Sergio Vale already warned in the Financial Times that, in his view, the fiscal situation today is worse than the one Lula inherited in 2003. “We are going to end the year with a debt around 84% of GDP, a primary deficit above 1% of GDP and very high interest rates . It's no use for the government to want to spend if there isn't room for it,” he declared.

However, there is room, as shown by the emergency aid adopted in 2020. At that time, the easing of the ceiling not only mitigated the drop in GDP, but also contributed to the increase in the debt/GDP ratio being contained, according to calculations by the Center Research Center in Macroeconomics of Inequalities at USP.

The example reveals the ideological background of the defense of austerity. If indebtedness were really the concern, it would be possible to have a technical discussion about the available alternatives —several of them less costly, economically and socially, than the one included in the CE.

The stubborn defense of austerity is based, as Michal Kalecki (1899-1970) noted, on the interest in reducing the size of the State, opening frontiers for the private appropriation of profits and strengthening capital's control over macroeconomic dynamics. Already in the 1940s, the Polish economist noted, in his classic article “Political Aspects of Full Employment”, that capitalists resisted the expansion of state action to maintain their “powerful indirect control over government policies”.

The liberal proposals are, according to his interpretation, a way of disciplining democracy through the market: “everything that can affect the level of trust needs to be carefully avoided, because it can cause an economic crisis”.

Conventionally, the clamor for austerity tends to be answered at the beginning of presidential terms. Pressured by the need to win votes, the Executive releases the reins of the Treasury in the period in which the polls are triggered and makes a fiscal adjustment at the beginning of the following period. The North American academy gave the phenomenon the name of political business cycle, linking the conflict unveiled by Kalecki to the electoral dynamics.

Lula suffered the corresponding pressure when he assumed the Presidency in 2003, leading him to cut in the flesh, in the form of an adjustment considered extremely harsh. Dilma made a second, when she reached the presidential chair in 2011. It turns out that, now, if Lula does not take advantage of the power that he will bring from the accumulated votes to break the fiscal straitjacket, he will lose a crucial amount of time.

The risk of waiting for the revision of the amendment, scheduled for 2026, is high. Such a wait would imply taking on the burden of imposing austerity on a helpless and disillusioned population for the next four years. There will be a democratic respite if the ceiling is revoked in the first half of 2023, when the winning coalition will have maximum strength in Congress. Afterwards, the inevitable wear and tear of managing a society shattered by the lost decade (yet another one) will take its toll in terms of party support and negotiation.

As the State's tax bases were deteriorated by the crisis that opened in 2014 and following, it will be necessary to combine the repeal of the ceiling with a tax renegotiation that allows to confer progressivity to the system. If it does, the recovery of spending capacity will not imply an explosion in the public debt, which would not only stifle the concentration of income, by expanding the channeling of public funds to debt holders, but would also weaken the State vis-à-vis the rentiers.

The alternative of simply replacing the current rule with some attenuated austerity, making it impossible for the public power to act in the short term, would represent more of the same.

Lula's inauguration will not, by itself, disarm the authoritarian threat and will not magically dismantle the militant and organized base of the extreme right. Tackling autocratism will require improving deteriorating living conditions, restoring job creation and increasing incomes. There is no way to reconcile this task with meeting the demands for austerity.

Austerity, by the way, which does not deliver what it promises. The parliamentary coup and the approval of the ceiling managed to recover confidence indices and the prices of shares traded on the Stock Exchange, but the population is still waiting for the fruits of the strategy.

The ceiling law is not just a constitutional amendment, it is a sabotage mechanism aimed at deconstructing the 1988 pact and opens an avenue for Bolsonarism. We return to Kalecki: “the struggle of the progressive forces for full employment is, at the same time, a way to prevent the return of fascism”.

If, in order to defeat the autocratic threat, it is necessary to form an interclass alliance, such as the one that took place in the USA to remove Trump from the White House, the terms of the respective internal negotiation must be clear.

In the US, thanks to the Black Lives Matter uprising in June 2020, the relative weight of Bernie Sanders and the DAS (Democratic Socialists of America) grown up. Not by chance, the package presented by Biden in April 2021 was considered by Sanders, if approved, as the biggest advance in favor of the working class since the New Deal by Franklin Roosevelt, president between 1933 and 1945. Its implementation, however, continues to suffer resistance within the Democratic Party itself, not to mention the Republican Party.

In Brazil, as usual, the game is tougher, and the pressure to inhibit the necessary future boldness began even before the election. It is a conflict that places class issues at the core of the fight against autocratism with a fascist bias. Its outcome will define the course of Brazilian democracy.

* André Singer He is a professor at the Department of Political Science at USP. Author, among other books, of The meanings of Lulism (Company of Letters).

*Fernando Rugitsky Professor at the Department of Economics at USP and at the University of West England – Bristol.

Originally published in the newspaper Folha de S. Paul.

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