Giving With One Hand, Taking With the Other

BRAZIL ECONOMICS - Report 04 Jul 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The economic team led by Meirelles inherited a grave fiscal situation, with an explosive public debt trajectory that cannot be fixed in the short run, even with approval of bold measures, such as the proposed constitutional amendment (PEC) that would cap real growth of expenditures. Despite the naturally limited political capital of an interim government, Temer has made progress by proposing measures to put the economy on the correct heading. But along with the advances, he has yielded on other points that worsen the quality of the adjustment and generate risks to its continuity. We believe it was unavoidable to go easy on the state governments in renegotiating their debts, in return for their engagement in the adjustment of spending, which was achieved. But it is incomprehensible to have caved in on the adjustment of civil servants’ pay. In politics it is often necessary to yield on one point to advance on another, but given the size of the fiscal crisis, the room for concessions is very limited, and repetition of this tactic will inevitably raise the level of uncertainty.

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