This is Part I of a five-part series entitled What now? The trade-offs and budget cuts needed to fix Brazil’s finances. Part I examines spending in the Brazilian government’s premier social welfare program.
Brazil is one of the world’s most unequal societies, something that stunts development and creates a whole host of social problems. Nevertheless, recent government initiatives to help alleviate inequality and poverty have often been the target of criticism. A common refrain among supporters of Dilma Rousseff’s impeachment and opponents of her Workers’ Party (PT), which has been in power for the past 13 years, is that the government’s lauded welfare programs for the poor, a central tenet of the PT’s policies, are simply too expensive. It is all too clear that many wealthier Brazilians have a negative perception of social programs like Bolsa Família, which provides cash transfers to poor families. As the government works to close a record R$ 170 billion budget gap, some have argued that cuts will have to be made to these social programs.
However, they would be well advised to rethink these positions: as the country’s premier social welfare program, Bolsa Família should not be considered an expense, but an investment. And as far as investments go, it is a bargain: In total, the program has a yearly budget of about R$ 28 billion, accounting for just 0.5 % of GDP. Further, economists estimate that for each real disbursed, Bolsa Família has generated an increase in GDP worth R$ 1.78.
Meanwhile, cutting Bolsa Família would take away critical aid to a huge amount of people: 11 million families, or 46 million people; that is, roughly one-fourth of the total Brazilian population. These are the most vulnerable members of society, who have historically suffered from neglect and lack of opportunity and are now disproportionally affected by the consequences of Brazil’s economic crisis, the worst since the Great Depression. They are particularly vulnerable to rising unemployment and inflation, especially increasing food and energy prices. Removing their assistance would worsen the economic downturn by strangling their purchasing power even further. This is because the modest payments disbursed to recipients, which average R$ 70 a month, essentially double their incomes. That is money that the roughly 25% of the country’s population that benefit from the program can spend, supporting the economy as a whole (studies indicate that most of the money is spent on food, school supplies and children’s clothing). In light of the terrible crisis, the economy certainly needs all the help it can get.
This type of internal consumption is especially critical in a country like Brazil, where economic growth is highly dependent on the export of commodities. Low oil prices and weak demand for commodities in general have taken a huge toll on Brazil, with GDP expected to contract by almost 4% in 2016, after having contracted by a similar amount in 2015. As the commodities slump continues, Brazil will have to rely on internal consumption to recover from the economic crisis. Taking modest government assistance away, then, would end up being extremely costly to the economy as a whole while doing little to fix the country’s finances in the short-term.
Nevertheless, calls for reductions to the program have accelerated in recent days, after news surfaced alleging widespread fraud. It was found that between 2013-2014, about R$ 2.5 billion were paid out irregularly, representing almost 10% of Bolsa Familia’s yearly budget and affecting up to 1.4 million people. It appears that payments were given out to people who did not possess tax identification numbers, or who had multiple such numbers, as well as deceased individuals and people ineligible for the program, including public employees, campaign donors and business owners.
Clearly, this is a huge problem. Yet it also represents an opportunity: It means that Bolsa Familia can be streamlined simply by eliminating such fraud, saving over R$ 2 billion without cutting benefits to the 90% of recipients who actually need them. In addition, according to the economist behind the program during the Lula years, Ricardo Paes de Barros, further budget cuts could come from reducing inefficiencies and waste.
No welfare program is perfect, and there are indices of fraud and inefficiency anywhere in the world where such programs exist (consider the vocal critics of the American welfare system). This is not a reason to get rid of such programs, which serve an essential function. It just means that they must be constantly monitored, refined and improved.
In any case, none of this is the fault of the tens of millions of legitimate program beneficiaries. The fraudulent payments in this case are merely a classic example of a long-present pattern in the Brazilian system: politicians looting government coffers to buy loyalty by doling out patronage. The fact is that money is skimmed everywhere, as exemplified by the scandal at the state-owned oil company Petrobras, where an estimated R$ 6 billion were stolen through inflated contracts and kick-backs. Still, no one is suggesting that we get rid of Petrobras, just that we root out the corruption and punish those responsible. The same should go for Bolsa Familia.
No matter how much we would like to believe otherwise, Brazil is and remains a poor country. The fight against poverty is critical to Brazil’s long-term growth prospects, and Bolsa Familia has proven to be an invaluable asset in that fight. Sensible reforms that ensure that less money is wasted while more money gets to the needy are essential, but the larger framework should stay. The same goes for Brazil’s other social programs, like Minha Casa Minha Vida, which helps increase home ownership among the nation’s poorest and was also this week the target of speculations regarding fraud. That these programs were used unfairly by some does not mean that they should be taken away from all. Those committing fraud (and those in the government that allowed the fraud to happen) should face the consequences of their actions. The nation’s needy are not at fault here and, having already suffered more than enough, should not be punished for the misdeeds of the political classes.
Having considered all of this, we must also maintain a sense of perspective regarding the small size of Bolsa Familia relative to Brazil's larger fiscal problems. If fraud represents 10% of a program that represents 0.5% of GDP, we are talking about just 0.05% of GDP. The fraudulent amount of R$ 2.5 billion is a lot of money, but it hardly makes a dent in the budget deficit of R$ 170 billion. Clearly, optimizing and streamlining programs like Bolsa Familia is not enough. Much more savings need to be found, and given Brazil’s massive bureaucracy, there are far greater targets for cuts.
The next section of this series will examine a far fairer and more promising area for budget cuts: the government subsidies that end up benefiting Brazil’s wealthy.