Only ‘deep’ budget reform can rein in public debt, former minister says
Paulo Paiva says fiscal reform will only be felt in the long term, when it actually cuts inflation and interest rates
Divulgação
Without a deep budget reform involving periodic spending reviews and incentives for public managers, fiscal rules like those Brazil has had over the past 30 years will not be enough to keep public debt from rising. That is the assessment of Paulo Paiva, an associate professor at Fundação Dom Cabral and former minister of Planning and Budget and of Labor under president Fernando Henrique Cardoso. Without such reform, he projects, gross general government debt will rise from the current 82.9% of GDP to close to 100% in 2030.
Brazil’s fiscal outlook remains unresolved ahead of election
Brazil’s top companies urge fiscal reform and tax overhaul
Brazil learns fiscal discipline the hard way
“There is no longer room for fiscal frameworks that generate primary surpluses large enough to finance the debt,” he says. As minister, Paiva was responsible for including in the 1999 Budget Bill a provision guaranteeing a primary surplus for the federal government, which he calls “the first fiscal rule established in Brazil.” The primary balance is the difference between revenue and spending, excluding public debt payments. But with mandatory spending growing rapidly in recent years, even later fiscal rules, such as the Spending Cap and the New Fiscal Framework, are not enough to put public debt on a downward path, he says.
In the short term, starting next year, Paiva argues that Brazil needs both to review the indexation of expenditures to increases in the minimum wage and to end the current system linking health and education spending to tax revenue. He also says congressional earmarks must be “disciplined.”
In the medium term, starting in 2028, budget reform would take shape along four fronts. The first is a systematic spending review to replace “linear and arbitrary cuts with evidence- and results-based reallocation.” A bill addressing this is already making its way through Congress.
Another measure would establish four- to five-year budgets exclusively for investments deemed strategic. A third would introduce, also through legislation, rules rewarding public managers for the efficiency with which they use resources, such as bonuses for meeting targets set in advance. “It is the opposite of seniority-based pay increases, such as five-year service bonuses,” Paiva says, referring to automatic salary increases for public servants every five years.
Finally, he advocates revising the 1964 Public Finance Law to eliminate Brazil's “endless tangle” of “constitutional provisions, complementary laws, ordinary laws, decrees, administrative orders, and so on.”
According to Paiva, even if measures such as ending mandatory spending earmarks have a significant fiscal impact, budget reform is essential to “eliminate wasteful spending,” making public policies and the economy as a whole more efficient. Although he warns of the severity of Brazil's fiscal situation, Paiva says the solution to the imbalance in public accounts lies in combining “gradualism” with political support.
“We will not solve this problem in the short term. We need to address it through a strategic plan that is understood by the market and the public,” says Paiva, who also served as vice president of the Inter-American Development Bank (IADB) and president of the Minas Gerais Development Bank. “The budget is the institution in which interests come into conflict with one another. It is essentially a political issue, but it must be reconciled with technically sound solutions.”
He says, however, that persuading the public of the importance of budget reform would be harder than implementing the Real Plan. “Currency stabilization was felt by the public immediately,” he says. “Budget reform will only be felt when its effects bring down interest rates and inflation and, in turn, lead to increases in employment and real wages.”
Beyond fiscal policy, the former minister says Brazil's other main economic problem is labor productivity, which has been “stagnant for decades.” Paiva, who holds a doctorate in demography from the University of Pennsylvania, notes that Brazil's economy has been growing primarily because of household and government consumption.
But he also points out that the country is losing its demographic dividend, the period when the working-age population outnumbers children and older people, as its population ages. In this context, he stresses the importance of advancing “on the supply side” of the economy by improving education and boosting innovation.
