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Brazil’s much-vaunted pension reform passes into law

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Via Financial Times

Brazil’s Senate approved a much-anticipated pension reform on Tuesday, a victory for President Jair Bolsonaro that paves the way for his economics team to pursue further sweeping changes.

Decades in the works, the reform was hailed as “historic” by politicians across the spectrum. It is aimed at restoring domestic and international confidence in Latin America’s largest economy by tackling the nation’s woeful fiscal position.

By raising the retirement age for men to 65 and women to 62, the new legislation is forecast to save the state some R$800bn ($196bn) over 10 years.

The overhaul was passed following a second vote in the Senate, Brazil’s upper house of parliament and although it could still go through some tweaks, it is now expected to be formally enacted in the coming weeks.

During the first vote, several lawmakers successfully managed to dilute the legislation, but Paulo Guedes, the finance minister who spearheaded the reform, declared: “We are very happy with the result. We are on track for other reforms.”

Originally Mr Guedes wanted the bill, which amends Brazil’s constitution, to save more than R$1tn. The revised plan passed with a vote of 60 in favour — a comfortable margin above the 49 votes required — and with 19 against.

“This fiscal impact is extremely relevant. It will give us breathing space to rebalance our budget,” said Rogério Marinho, the government’s social security secretary. “The main thing is that it creates predictability and legal certainty to demonstrate to the market that the country will honour future commitments. And it paves the way for tax reform.” 

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The pension overhaul — a process initiated by Mr Bolsonaro’s predecessor Michel Temer — will provide breathing space for the president, who came to power in January on promises to revitalise the nation’s ailing economy but has been stung by consecutive quarters of anaemic growth as well as a series of domestic and international scandals.

“Congratulations Brazilian people! This victory, which paves the way for our country to take off for good, is yours! Brazil is ours! GREAT DAY!,” Mr Bolsonaro tweeted after the Senate vote.

Under the University of Chicago-educated Mr Guedes, Brazil’s finance ministry has been working to simplify regulations and reduce the cumbersome bureaucracy and red tape that has for decades weighed on businesses.

The efforts, however, have yet to bear fruit, with unemployment still high at almost 12 per cent and economic growth stagnant. The country narrowly avoided a technical recession in the second quarter after posting 0.4 per cent growth.

The next big prize is a contentious plan to simplify the nation’s tax system, with reforms of value added tax and income tax and a reduction in payroll taxes.

“The conditions are being put in place for growth to accelerate,” said David Beker, chief Brazil economist at Bank of America Merrill Lynch, but tax reform “is going to be really complicated . . . We still don’t know what exactly that proposal will look like”.

Mr Beker said that economic recovery in Brazil is likely to be a gradual process and one that needed to be supported by the private investment given the constraints on the public purse. “You have to get the ball rolling, but it is a big ball, an iron ball,” he said.

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Additional reporting by Carolina Pulice

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