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Brazil’s Congress takes up new economic reform package

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Via Financial Times

Despite protests against free-market policies in other parts of South America, Brazil is pushing ahead on an ambitious overhaul of the bloated government machine and betting on the private sector to boost economic growth.

On Tuesday Paulo Guedes, the finance minister of Latin America’s largest economy, presented a string of constitutional amendments to Congress that, if approved, would allow the government to free up more of the budget for discretionary spending, automatically trigger austerity to comply with spending caps and scrap job stability for new civil servants in a bid to restore Brazil’s fiscal health.

“We are living in a state that spends a lot and spends badly. This is unacceptable, it has become a hostile environment for the creation of jobs and for development,” Mr Guedes said, adding that R$93 of every R$100 in the federal budget is earmarked for mandatory spending, making long-term investment almost impossible.

With a landmark overhaul of the pension system approved late last month, Jair Bolsonaro, the country’s conservative president, is keen to take advantage of the momentum. He accompanied Mr Guedes on a visit to Congress to present the package in person. “I feel things are starting to go in the right direction,” said Paulo Skaf, who heads the powerful industry lobby group Fiesp in São Paulo.

But some lawmakers are likely to resist the proposals. Mr Bolsonaro, always with a mercurial personality, has feuded with members of his own party recently, but the president nonetheless expressed confidence that the package would be approved “in a short time, perhaps early next year, mid-next year at most . . . and will benefit us all”.

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Rodrigo Maia, the powerful speaker of the lower house of Congress, recently told the Financial Times that there was enough support in Congress for the reform package to secure approval as early as March. “Maia is really engaged with the economic reforms, more than with any other kind of reform,” said Thiago de Aragão, a political consultant with the Brasília-based Arko Advice.

If the reform is pushed too far into next year, analysts warn, it risks being bogged down by electoral politics ahead of municipal polls in October. Campaigning for those, and the corresponding horse-trading, starts in May. Unlike the reform of the pension system, which has been in the works for more than two decades, the latest reforms are newly designed by Mr Guedes, a strong advocate of free-market solutions.

Tuesday’s package includes a “federative pact” that will create a fiscal council — including the president, the head of the supreme court, the speakers of both houses of Congress, the chief of the audit court and state governors — to oversee federal, state and municipal budgets and ensure that spending limits are not breached.

If certain trigger levels of spending are reached, officials would be empowered to declare a “fiscal emergency” and enact automatic austerity measures such as cutting the salaries and working hours of public servants to bring expenses back into line.

The next big prize for Mr Guedes after Tuesday’s package is a contentious plan to simplify the nation’s byzantine tax system, with reforms of value added tax and income tax and a reduction in payroll taxes. “The underlying logic here is that a fiscally austere administrative reform would need to be offset by a consumption-friendly tax reform in order for the whole effort to fly,” wrote Mario Marconini, Latin America managing director at the risk consultancy Teneo.

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Veteran senator Tasso Jereissati warned that tax reform “will be very difficult” to pass. Brazil’s latest free-market push comes as Ecuador experienced deadly street unrest following an attempt to lift fuel subsidies, while Chile — frequently cited as a model of good macroeconomic policy — experienced its worst violence in three decades in recent weeks, with citizens venting their anger at entrenched wealth inequality and the high cost of living.

“The Chilean people are rising against neoliberal policies while Bolsonaro and Guedes are trying to speed up the same model here in Brazil — we know how that story will end,” said Paulo Teixeira, a senior lawmaker from the leftist Workers’ party.

Bankers and investors, however, are enthused. Brazil’s stock market has been setting new records, and there has been a wave of big local initial public offerings after years of market doldrums. This week the government will auction off several big offshore oilfields for development in a move expected to net $25bn in licensing fees from international oil majors.

“There are a lot of foreign investors who are getting very excited now about the Brazil reform story,” said a senior foreign diplomat in Brasília.

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