WHEN a president has single-figure approval ratings, faces calls for her impeachment, and has lost control of her political base, is she in a position to play hardball with the country’s legislators? Brazilians will soon find out.
On August 31st Dilma Rousseff, their president, sent Congress a budget for 2016 with a gaping primary deficit (before interest payments) of 30.5 billion reais ($8 billion), or 0.5% of GDP, challenging its members to close the gap. It was a break with the sound-money practices that have underpinned Brazil’s economy. It was, some critics say, illegal. Certainly nothing similar has happened since at least 2000, when Fernando Henrique Cardoso, then the president, transformed public finances.
On a charitable view, Ms Rousseff was shocking legislators into making hard decisions rather than simply blocking her fiscal proposals. A harsher reading is that she does not know how to lead Brazil out of recession. The markets took that view. The day after the budget bombshell, the Ibovespa stock index fell over 2% and the currency closed at 3.7 per dollar, its lowest since December 2002. On September 2nd, the central bank held steady a key interest rate it had been raising since last year.
Public finances have already deteriorated this year. Having originally planned a primary surplus of 1.1%, in July the government cut that target to just 0.15%, as interest rates rose and tax receipts fell. The total deficit this year will be 8-9% of GDP. In August Moody’s, a rating agency, cut its assessment of Brazil by a notch to just above junk status. It hinted at worse to come by calling the latest news a sign of “the fiscal challenges that Brazil continues to face”.
The risk of a downgrade is one reason for the pessimism which, some pundits think, is now the prevailing mood in the corridors of power. “The government is basically throwing in the towel,” says Alberto Ramos, an economist with Goldman Sachs, an investment bank.
Ms Rousseff is in a tight corner. She issued her budget after scrapping a plan to reinstate a tax on financial transactions that would have brought in 80 billion reais in 2016. She retreated after her vice-president, Michel Temer, rejected the idea and told her Congress would block it. Several opposition figures say that, far from finding a way to make Congress do homework, the president has broken a fiscal-responsibility law enacted in 2000 as part of an effort to mend Brazil’s finances after decades of chaos. They say they may take her to court.
On this point, the president may be right. Mansueto Almeida, an economist who is critical of Ms Rousseff, says that though the law requires the executive to show how its spending will be funded, it allows a rise in debt. Júlio Marcelo de Oliveira, a prosecutor for the Federal Court of Accounts, agreed that the president, whose alleged budgetary misdeeds he has previously investigated, acted legally this time.
Legal or not, the president’s move weakens her American-trained finance minister, Joaquim Levy, who was reported to have lobbied for further spending cuts and was a reassuring figure for markets. Ms Rousseff has consistently failed to hit economic targets since being elected in 2010, but in the early days she dodged the political flak. Many people blamed her then finance minister, Guido Mantega, who was known for over-promising. Replacing him with Mr Levy was supposed to fix that problem; his loss of face bodes ill.
To restore credibility, Mr Ramos argues, the government needs to end up with a primary surplus of 3.0-3.5% of GDP. Simply stabilising the debt-to-GDP radio is not good enough, he says: it is already too high. At a minimum, tough horse-trading with Congress looms. Renan Calheiros, the president of Brazil’s Senate who has had several rows with Ms Rousseff this year, said on September 1st he would not send the budget back to her, as many opposition people want. “It is up to Congress to improve it,” he accepted. And on any fair assessment, Congress shares a lot of blame for Brazil’s economic woes; for example, it neutered many of Mr Levy’s better ideas.
Is there any way out? It looks unlikely that tax rises can be avoided: about 90% of the budget is ring-fenced, leaving little discretion for spending cuts. If the government were strong and confident, it might acknowledge the need for a short-term rise in debt while seeking ways to limit spending on pensions, health and education, and laying out a long-term plan to restore fiscal health. But pushing such reforms through Congress would take political will and capital, and this was not done during Brazil’s boom years when it would have been easier. Now, says Mr Almeida, “We are paying for all of the mistakes [of] the past five years.” The mystery, he adds, is why Brazil has not lost its investment grade already.