NO TO RECESSIVE ECONOMIC ADJUSTEMENT OF BRAZILIAN GOVERNMENT OF MICHEL TEMER

NO TO RECESSIVE ECONOMIC GOVERNMENT OF MICHEL TEMER

ADJUSTEMENT

OF

BRAZILIAN

Fernando Alcoforado * The Gross Domestic Product (GDP) is defined as the total value of production of wealth in a country during one year by resident economic agents in the country. Macroeconomic terms, GDP can be calculated in the currency of a particular country from the sum of all its components: GDP = C + I + G + X - M In this formula, C is the household expenditure on consumer goods (consumption private), I the expense of enterprises in investment, both in capital goods (gross fixed capital formation) and in raw materials inventories and products (ranging from stocks), G to government spending (federal, state and municipal government) in consumer goods (public consumption), X the revenue from exports and M to import spending. Based on this formula, GDP growth can be achieved with the expansion of private consumption (C) increasing the wage bill and adopting credit policy that encourages the consumer to buy, increasing investment in productive activity (I) ) that may result from reducing the tax burden and the implementation of a policy of fiscal incentives and attractive interest for entrepreneurs and the rise in government spending (G) with an emphasis on investments in economic and social infrastructure. The increase in export revenue (X) and the reduction in spending on imports (M) also contribute to the growth of the economy. During the Lula government and Dilma Rousseff governments, the adopted economic policy has been to encourage the increase in household consumption (C) and government spending (G) which made it impossible to increase public and private investment (I) that prevented, consequently, to achieve high GDP growth rates in the period 2002-2015 which was approximately 3% per year. The expansion of the Brazilian economy was unsustainable because it was boosted from 2002 to 2015 mainly by the growth of private consumption, which accounted for 60% of GDP. In 2015, savings of Brazilian households accounted for 5% of GDP, the savings of Brazilian companies was at the level of 15% of GDP and the savings of the public sector in Brazil was negative at 3% of GDP. The low level of private and public savings, a result of the high level of household consumption and government spending was one of the causes of low investment rate in the Brazilian economy, which reached 14% in 2015. The other cause of low investment rate in Brazilian economy has resulted in extremely high interest rates in the financial system which made unattractive investment in productive activities. During the Lula and Dilma Rousseff governments, the Brazilian government spent more than it collected of taxes accumulating debts that are among the highest among emerging countries. Due to increasing public deficits, public debt in Brazil increased from R$ 62 billion at the beginning of the Cardoso government in 1995 to R$ 687 billion at the beginning of the Lula government, to R$ 1.6 trillion at the beginning of Dilma Rousseff government in 2009 and R$ 3.3 trillion in 2016 at the end of Dilma Rousseff government. The analysis of these figures for the Brazilian public debt allows finds its increasing deterioration over time. This has contributed to the payment of interest and amortization of public debt that corresponds to about 45% of the Brazilian government budget. Maintaining the policy of allocating more resources to the payment of interest and amortization of debt, there will be fewer resources available by the 1

government (federal, state and local) to invest in economic and social infrastructure and transfer to social security, states and municipalities all in bankruptcy situation. The exhaustion of the model of economic growth based on the increase in household consumption (C) and the exponential growth of the resulting public debt resulting of excessive public spending (G) adopted by Lula and Dilma Rousseff governments caused the Brazilian economy was brought to bankruptcy in 2016 with the imbalance in the public accounts, the corporate bankruptcy and mass unemployment that has reached 12 million workers. The precipitous drop in consumption (C) and of the meager investment (I) contributed to the advent of the recession that reaches deep into the Brazilian economy. Given the fall in household consumption (C) and private and public investment (I) in the Brazilian economy, economic policy should be adopted to reverse the decline in economic growth and promote their retake would require: 1) the urgent adoption of a vigorous investment program of R$ 1.6645 trillion in the poor economic infrastructure; 2) to increase investment in social infrastructure (R$ 400 billion); and 3) to increase public spending in the short term to offset the decline in consumption and investment. These measures should be complemented by an increase in exports (X) and the reduction of imports (M). The investment program in economic infrastructure would be directed to ports (R$ 42.9 billion), railways (R$ 130.8 billion), highways (R$ 811.7 billion), waterways and inland ports (R$ 10.9 billion), airports (R$ 9.3 billion), energy sector (R$ 293.9 billion), oil and gas (R$ 75.3 billion), sanitation (R$ 270 billion) and telecommunications (R$ 19.7 billion). Investments in social infrastructure concern the health sector (R$ 83 billion per year), education sector (R$ 16.9 billion / year) and public housing (R$ 160 billion). In the case of economic infrastructure investment program is urgent to attract private capital and in the case of social infrastructure investment program urges the renegotiation of the terms of payment of the public debt to the Brazilian government to dispose of funds for investment. The consequence of all this set of measures would be the retake of the country's economic growth that would contribute to the rise in household consumption, the fall in unemployment and the reduction of inflation. Unlike this solution described above absolutely viable, the Michel Temer government adopted a recessive economic policy seeking to limit government spending with its proposal for amendment to the Constitution (PEC 241-2016) sent to Brazilian Congress. The measures proposed in PEC 241-2016 define new “ceiling” for public spending which will limit the prior year spending adjusted for inflation and this fact will cause public health and education spending are frozen in real terms going to be just corrected by inflation. It should be noted that with low consumption (C), low investment (I) and low government spending (G), the economy tends to further deepen the recession and make it harder to return to economic growth. To combat the economic recession, the Michel Temer government should, in the short term, increase government spending to compensate the drastic reduction occurred in household consumption and private investment. The PEC 241-2016 deals with primary expenditure, ie excluding government spending with the payment of interest and amortization of public debt, real reason of the public deficit. The makers of this PEC 241-2016 start from the premise that the Brazilian fiscal problem is a result of the accelerated increase in social spending, health, education, civil service, etc. when in reality it results from the uncontrolled growth of public debt whose main beneficiary is the financial system. But with Brazil practicing the interest rates 2

largest in the world, it is impossible to reduce public debt. PEC 241-2016, as well as other measures being gestated, aims to ensure the maintenance of transfers of wealth from society to the financial system. * Fernando Alcoforado, member of the Bahia Academy of Education, engineer and doctor of Territorial Planning and Regional Development from the University of Barcelona, a university professor and consultant in strategic planning, business planning, regional planning and planning of energy systems, is the author of Globalização (Editora Nobel, São Paulo, 1997), De Collor a FHC- O Brasil e a Nova (Des)ordem Mundial (Editora Nobel, São Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, São Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado. Universidade de Barcelona, http://www.tesisenred.net/handle/10803/1944, 2003), Globalização e Desenvolvimento (Editora Nobel, São Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX e Objetivos Estratégicos na Era Contemporânea (EGBA, Salvador, 2008), The Necessary Conditions of the Economic and Social Development-The Case of the State of Bahia (VDM Verlag Dr. Muller Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe Planetária (P&A Gráfica e Editora, Salvador, 2010), Amazônia Sustentável- Para o progresso do Brasil e combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2011), Os Fatores Condicionantes do Desenvolvimento Econômico e Social (Editora CRV, Curitiba, 2012), Energia no Mundo e no Brasil- Energia e Mudança Climática Catastrófica no Século XXI (Editora CRV, Curitiba, 2015) and As Grandes Revoluções Científicas, Econômicas e Sociais que Mudaram o Mundo (Editora CRV, Curitiba, 2016) .

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