Political Victory for Temer During Anxious Times for Brazil

Congress approves a spending limit, but corruption and economic distress still overshadow Michel Temer’s presidency.

Brazil’s president, Michel Temer, scored a major political victory last week when Congress passed a constitutional amendment that limits public spending for the next twenty years.

This was no small feat, given that 63 percent of Brazilians, according to one recent poll, want Temer out.

At the same time, right-wing parties, which support his austerity program, prevailed in municipal elections in October at the expense of the long-ruling Workers’ Party.

Shock therapy

Even before his predecessor and erstwhile coalition partner, Dilma Rousseff, was impeached in August, Temer, then vice president and head of the Brazilian Democratic Movement Party (PMDB), announced the amendment as the cornerstone of his reform effort.

It was introduced not only to revive the economy; the move also distracts attention away from an historic corruption scandal and the still-controversial impeachment of Rousseff.

The amendment means that annual increases in federal spending will not be permitted to exceed the rate of inflation in the preceding twelve months.

The limitation is designed to remain in place until 2037. Federal institutions that do not comply with the cap will be barred from hiring new employees.

Businesses have generally welcomed the news, seeing spending restraint as essential to calming the markets and attracting foreign investment.

Temer’s supporters argue that something like “shock therapy” is needed after thirteen years of fiscally irresponsible leftist rule under Rousseff’s Workers’ Party.

Brazil is in its worst recession in a century. The federal deficit exceeded 10 percent of GDP last year and is expected to reach similar heights this year.

Too rigid

Detractors argue that simply capping spending is too rigid and does not take into account the potential for economic and population growth or indeed an aging population. Spending on vital government services like education, health care and infrastructure will — in real terms — stagnate. The constitutional amendment leaves this and future governments with little room for maneuver.

But there is no doubt Brazil needs reform. Just look at pensions, which are one of the biggest public expenditures.

Over the past fifteen years, while the Workers’ Party was in power, spending on pensions rose from 3 to 7 percent of GDP.

Brazilian men typically retire at the age of 54 and women at 52, much earlier than in other industrialized countries.

On average, Brazil pays pensioners 90 percent of their final salary, compared with a developed-world average of 60 percent. There are also huge disparities between pensions within the public sector.

The government recently put forward long-awaited pension reforms that would require Brazilians to work longer and make larger social-security contributions.

Tax increases are unlikely. Although Brazilians in the highest tax bracket only pay 27.5 percent on their income and the country is one of the most unequal in the world, Temer’s center-right allies in Congress would almost certainly veto any attempt to raise taxes.

Corruption scandal

Hanging over the political system like a dark cloud is the sweeping anti-corruption investigation known as Operation Car Wash, active since 2014. It has already uncovered around $2 billion in funds that were diverted to politicians and their allies from contractors bidding for work with the state-owned oil and gas company, Petrobras.

Instead of seeking to recoup public funds that “disappeared” through widespread malfeasance, Congress is trying to return to business as usual.

After 2.5 million Brazilians signed a petition, an anti-corruption was proposed that would crack down more severely on graft. But it was rewritten by lawmakers to shield themselves from prosecution and weaken the authority of prosecutors.

The revised version passed 450-to-one in the lower house. Tens of thousands of Brazilians took to the streets to demonstrate against the legislation. Prosecutors have threatened to resign en masse if the Senate confirms it.

Between 30 and 60 percent of the members of Congress are currently under some kind of investigation, whether it is for electoral fraud, money laundering or murder.

Temer’s administration is hardly unaffected. Within a month of his all-male, all-white cabinet’s installation, three ministers had already stepped down again.

The president will have to be at his most sanguine if he is to survive demands from an impatient and emotionally-charged electorate and his opportunistic allies in Congress. Should he continue to display political deftness and convince the public that his economic plans are prudent — and that the Workers’ Party is the blame for the mess Brazil is in — he may yet stick around long enough for the next election, which is due in 2018.