An Example of Explicit Populism
It is not unreasonable for a government, despite fragile fiscal fundamentals, to increase spending on income transfers in favor of the people most affected by a shock like the pandemic. However, populist measures that allocate scarce resources with the objective of temporarily raising the president’s popularity in the upcoming reelection campaign are very different. In the first part of this report, we summarize the fiscal measures that, although exaggeratedly and arbitrarily expanding spending due to the capture of the budget by the Centrão (such as the so-called “secret budget”), have for some time produced positive effects on economic activity and stimulated recovery.
However, according to the results of the latest Annual Continuous PNAD, those spending increases have not prevented a decline of 48% in the average monthly per capita income of the poorest 5% of the population since 2012. This situation can partly be blamed on the high inflation, which falls most heavily on the poorest households, and partly by the precarious labor market. Largely due to this situation, Bolsonaro’s popularity is low, and he has reacted with the “trick” of trying to produce an artificial (and temporary) decrease of inflation. This would consist of approval by Congress of measures to reduce the prices of fuels, with a potential effect of lowering inflation by up to 2 percentage points. For this purpose, it will be necessary to obtain congressional approval of measures that would: a) limit the maximum rate of ICMS on fuels to 17%; and b) reduce temporarily that rate to zero on diesel and cooking gas, from now until December 2022.
This is an artificial maneuver that harks back to the price index purges that occurred during the years of indexation of wages and prices and the attempt to end inflation with a knockout blow during the Collor administration. The forgone revenue of the states would be defrayed by the federal government using extraordinary revenues (which ones?), which if the government really had lasting economic and social objectives, could be allocated to the existing income transfer programs. There is nothing in the field of economic theory to justify the route chosen by the government. The result will only be to spend more public money and spend it poorly, in a case of explicit populism with the sole aim of trying to win reelection.
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