Former Brazilian finance minister Maílson da Nóbrega co-wrote the recent documentary O dinheiro é nosso (The Money is Ours) which explores the fallout of botched public financial management. In an interview with LatinFinance, he discusses fiscal and social issues, inflation and other challenges in Brazil and Latin America.
LatinFinance: How serious is Brazil’s fiscal predicament?
Maílson da Nóbrega: Brazil has a fiscal situation that is very dangerous, very difficult. We have unparalleled budgetary rigidity. Over 90% of federal primary spending relates to just five spending groups: personnel, security, health, education and social programs. The world average is 50%. In other words, governments have half the budget to exercise or conduct public policies for development, for the reduction of inequality, for the rest of the expenditure. Brazil has less than 10%. This is totally unsustainable. That is one point.
The other point is that we have a relatively high public debt. Public debt, as we know, is the main indicator of public sector solvency. We have an [official] debt-to-GDP ratio of 77%. But according to the International Monetary Fund metric, which includes the central bank’s bond portfolio in debt, this debt is much higher. It is close to 80% of GDP, and it may reach close to 90% by the end of the Lula [Luiz Inácio Lula da Silva] administration.
Photo: Maílson da Nóbrega
So, the government’s great challenge is not only to approve a credible fiscal framework, but to create an environment for discussion and mobilization to attack this mandatory spending issue. The fiscal framework proposed by the government to Congress was a positive surprise to some extent, but unfortunately everything indicates that it will not be able to prevent the increase of this debt-to-GDP ratio because the government has very optimistic estimates for the trajectory of the Brazilian public debt in the coming years.
LF: Brazil is experiencing a recurrent, if not permanent, fiscal crisis. Why?
MB: There are several reasons. First of all, there is a cultural issue. In other words, the Brazilian political class, in general, and the Workers’ Party [PT, of President Lula] in particular do not acknowledge that there is a fundamental concept of public finance, which is budget restriction. That is, the state cannot spend more than its capacity to collect taxes and take on debt.
In Brazil, politicians give the impression that there is no problem, as if you can always spend. And the PT in particular believes that what promotes development is public spending, not productivity. [Former] President Dilma [Rousseff] once said a famous sentence: “Gasto é vida” (“Spending is life”).
So, I think it has to do with this culture that prevails in the political class. There is a perception that the state has a much greater role to play than what we see in other countries. It is as if you always have money for everything. We are still trapped by these ideas that it is okay for the government to always have money, and the government is the one that develops the country. And it is not.
LF: Does this seemingly perpetual fiscal crisis affect the financial system and the capital markets?
MB: I would say that this fiscal issue has a negative impact on expectations and the perception of risk, and that is why Brazil is assessed as a greater risk, for example, than Costa Rica because we may face a public debt crisis in Brazil if this issue of mandatory spending is not resolved.
On the other hand, the perception that the current government is pro-spending also affects expectations. For example, the perception of inflation increased after Lula returned to power. It has generated much higher interest rates, which has an impact on capital markets. Brazil’s natural interest rate, so to speak, is that interest rate that allows the economy to function without inflationary pressures or problems with the balance of payments. This natural rate is very high. The central bank estimates that it may be a minimum natural rate, so to speak, of around 5%. In rich countries, it is 2%. The base rate of the central bank reflects this reality of greater fiscal risk here in Brazil than in developed countries.
LF: You mentioned inflation. How do you rate the way the government is handling inflation? You were a finance minister in the late 1980s. Of course, it was a very different context back then, but what are the lessons you would draw from that period?
MB: The government has been acting correctly in its efforts to bring inflation on target. In terms of monetary policy, the central bank has managed to resist pressures from Lula, government members and PT leaders to cut interest rates forcefully. Its independence has been defended and preserved.
The legacy of hyperinflation of the 1980s is the perception, especially among the poorest Brazilians, that inflation is an evil to be attacked on a permanent basis. Before that, there was a wrong idea, which was widespread especially among a large part of the elite, that inflation had a role to play in the development of the country.
LF: What comparison can we make with Latin American countries that are facing severe fiscal and social challenges?
MB: There is a very common feature because we come from the same Iberian roots. Chile is a good example of a country that professes the ideas of fiscal responsibility. But generally speaking, Latin Americans have been living with periodic fiscal crises for many years because they all reflect that type of vision that has a cultural effect, an unambiguous cultural origin. Of course, that could change. Culture changes. It can change through education; it can change through information. And one of the objectives of this documentary [The Money is Ours] is precisely to generate information for the general public to understand issues that are complex today about public finance. To do that we sought with the testimony of several personalities to make it more accessible and understandable, people who have better ways to explain these issues and make them understandable. LF