The price of incentive to spend

PT’s economic policy has two moments: in the first, which runs until the middle of the second term of Squidthe macroeconomic tripod was maintained – fiscal responsibility with a primary surplus, inflation and floating exchange rate – established during the management of Fernando Henrique Cardoso and which consolidated economic stability after many years of hyperinflation. In the second moment, the tripod was replaced by indiscriminate spending, motivated by the belief in the role of public power as a promoter of development, and which culminated in the great recession of 2015-2016. But the federal government was not the only one to spend what it had and what it didn’t have, as if there was no tomorrow: it also encouraged states and municipalities to do the same, and now the Union pays the bill.

report of People’s Gazette showed that, since 2016, the Union has already paid R$ 46.5 billion to honor debts incurred and not paid by states and municipalities. The data are in a National Treasury report released earlier this month – in the first half of this year alone, payments totaled R$ 4.6 billion. This is because the federal government is the guarantor of these loans, and is legally obligated to fund the payments when the lender defaults. How did it get to that point? The answer lies in the stimulus that the federal government began to give, as of 2007 (that is, at the beginning of Lula’s second term), for states and municipalities to contract loans regardless of the solidity of their fiscal health.

The fiscal chaos experienced by some states and municipalities was not created by PTismo, but was enhanced by the irresponsibility promoted from 2007

That year, the adjustment process triggered by the Fiscal Responsibility Law, approved in 2000, was interrupted. At the end of 2006, the Petrobras confirmed the existence of Petroleum in the layer of pre-salt; in January 2007, the government launched the Growth Acceleration Program (PAC); and, in October 2007, Brazil was chosen to host the 2014 World Cup. The euphoria can be summarized in the following cycle: states and municipalities could incur debt to carry out investments, which would lead to economic growth, providing greater revenue, which would allow the discharge of these same debts.

The Union, even aware that it would have to pay for possible defaults, bet on an infinite growth of the economy and guaranteed loans for states and municipalities with low grades in payment capacity (Capag), to the point that, between 2012 and 2014, credit granted to subnational entities with Capag C or D be greater than that granted to entities with Capag A or B. The total value of loans exploded – and, shortly afterwards, came the recession and, with it, default. The Union, then, tried to compensate for the losses, blocking transfers from the participation funds of states and municipalities (FPE and FPM) to recover the amounts that had to be disbursed as guarantor. This practice, however, has been prevented by injunctions from the Federal Court of Justiceleaving the federal government alone with the damage in its hands.

Despite the current situation (or perhaps because of it, since the STF has maintained federal transfers to defaulting states and municipalities), subnational entities continue to be reluctant to carry out their respective fiscal adjustments, omitting to reform their pensions and even granting readjustments to the civil service without having the resources to do so, or compromising the limits with personnel determined by the Fiscal Responsibility Law. And at the beginning of Covid-19 pandemicthey almost got a nice gift from the National Congress, as a good fiscal recovery plan for the states, the Mansueto Plan, was destroyed and replaced by a text that would allow even more indebtedness with the Union as guarantor and without any counterpart, under the pretext of combat the coronavirus. In the end, after much pressure from the economic team, the aid plan was approved without this device.

The fiscal chaos experienced by some states and municipalities – as there are, yes, good examples throughout Brazil – was not created by petismo, but was enhanced by the irresponsibility promoted from 2007 onwards. However, even later governments were not able to reverse the process. The aforementioned Mansueto Plan was the best chance the country had, as it had the intelligence to demand that the states implement adjustment measures as a precondition for debt renegotiation, while all other recovery regimes leave the state counterparts for a second moment. – this is how Rio de Janeiro avoided as much as possible the privatization of Cedae, its basic sanitation company, which was one of the requirements for Rio to join the Fiscal Recovery Regime (RRF). If it is not able to eliminate “moral hazard” by encouraging state and municipal fiscal adjustments, the federal government will continue to foot the bill for other people’s spending for a long time.

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