The government of President Michel Temer plans to freeze budget spending in real terms for 20 years to plug a gaping budget deficit and haul Latin America’s largest economy out of its worst recession in more than a century.
A spending-cap constitutional amendment passed the first of two rounds of voting in the Senate earlier this week. The final vote is expected later this month. The government has also promised an overhaul of the bloated pension system and the labour law reform. These measures, though popular with investors, are likely to provoke fierce opposition from large sections of the population.
After two years of a recession – during which Dilma Rousseff, Mr Temer’s leftist predecessor, was impeached for budgetary irregularities and the wide-ranging corruption scandal surrounding the state-controlled oil company Petrobras put dozens of company executives, contractors and politicians in jail – there are no signs of the economic recovery. GDP shrank 0.8 per cent in the third quarter of 2016 from the previous quarter, according to the data published by IBGE, the national statistics office. That was the seventh straight quarter of contraction and the fastest pace of quarterly decline this year. The economy shrank a revised 0.4 per cent in the second quarter after contracting 0.5 per cent in the first quarter. GDP contracted 2.9 per cent from the third quarter of 2015.
All sectors of the economy fell during the third quarter. The decline was driven by a fall in investment spending, which dropped 3.1 per cent quarter-on-quarter and 8.4 per cent from the same period a year earlier. Agriculture fell 1.4 per cent from the previous three months. Industries dropped 1.3 per cent. Services declined 0.6 per cent. Family consumption, which is under pressure by household indebtedness, fell 0.6 per cent. Government consumption declined 0.3 per cent. The economy is expected to shrink 3.5 per cent this year after a 3.8 contraction last year. The government forecasts a 1 per cent expansion in 2017.
Inflation, the old scourge of the Brazilian economy, has been slowing partly due to a severe recession. Consumer prices rose 7.87 per cent in October from a year earlier, the lowest level in over a year-and-a-half, but still well above the central bank’s mid-point target of 4.5 per cent. The central bank slashed borrowing costs for the second straight month on November 30, cutting the benchmark Selic rate to 13.75 per cent from 14 per cent. The move followed a quarter-point reduction in October, which was the first cut in four years. Unemployment is close to 12 per cent. The budget deficit is running at 10 per cent of GDP. Brazil’s overall government – including federal, state and municipal levels – spends the equivalent of a developed nation, but without providing services people enjoyed in a rich economy. Public debt stands at nearly 70 per cent of GDP, which is an unsustainable level given Brazil’s high interest rates.
Mr Temer is seeking to gain legitimacy through his austerity programme aimed at reviving the economy. That, however, is complicated by never-ending corruption scandals. Eduardo Cunha – a member of Mr Temer’s centrist Brazilian Democratic Movement Party and former speaker of the lower house of parliament who was the political mastermind behind Ms Rousseff’s impeachment – faces charges that he took bribes as part of the corruption scandal at Petrobras and that he interfered with the investigation. If he signs a plea bargain, he will implicate members of Mr Temer’s administration (Mr Cunha triggered the impeachment process after Ms Rousseff’s leftist Workers’ party refused to protect him in Congress from charges of hiding millions in Swiss bank accounts). A plea bargain agreement between prosecutors and executives of Odebrecht, Brazil’s largest construction company at the centre of the Petrobras corruption scandal, could implicate more than 100 politicians in the Petrobras case.
The latest scandal involves Marcelo Calero, the former culture minister, and Geddel Vieira Lima, who was in charge of the Temer administration’s relations with Congress. Mr Vieira Lima sought Mr Temer’s help to pressure Mr Calero to approve the apartment development in a preservation area in the city of Salvador, in which he had bought a flat. Both Mr Calero and Mr Vieira Lima have resigned. Mr Temer has lost an average of a minister a month due to allegations of corruption since he took power.
Photo by: Marcelo Valente / CC BY-ND 2.0
