One of the guys in charge of fixing Brazil’s finances just posted a frustrated but informative Twitter rant - UPDATED

As a Secretary in the Finance Ministry of Michel Temer’s interim government, economist Mansueto Almeida is one of the people tasked with the seemingly impossible task of fixing Brazil’s finances in the face of a crushing recession and a record budget deficit of some R$ 170 billion. Unsurprisingly, he is frustrated. Frustrated with the difficulty of it all, for sure, but even more so with the widespread speculation and unrealistic expectations coming from analysts and commentators about how and how quickly it should be done.

As the government works on the challenging task of establishing a goal for the primary budget for next year (which will undoubtedly once again be a huge deficit – just how huge is the issue at hand), he did what so many of us are prone to do: he took to social media to air out his grievances.

“It is illusory to expect a rapid recovery of the budget coming out of two years of falling GDP for growth that the market estimates at between 1-2%.” 
“Don’t believe in magical solutions. The last people that did that are being investigated by the TCU (Brazil’s highest fiscal accounting court).”

In a series of tweets, he presents the realities of the situation, focusing on the size of the current deficit and highlighting the fact that, due to the recession and generally fragile state of Brazilian politics, it must be solved without resorting to tax increases as much as possible. This necessarily means that it will take a good bit of time to sort out.

“The fiscal adjustment now needs to come from the expense side, and therefore needs to be gradual. But this is what everyone wants.”
“Is it possible to make a very fast fiscal adjustments of 5 points of GDP in two years without increasing taxes? No. Has any country ever done that? No.”

Instead of absorbing this hard truth, however, people have been making unrealistic projections of future growth, criticizing proposed policies for not going far enough and offering completely unfeasible alternatives.

“The fiscal debate is confused and some people’s suggestions to improve the primary goal are not politically viable because the people do not want them.”
“One analyst’s suggestion: ‘Just need to correct social security benefits to below inflation’. Seriously? Who is going to approve this madness?”

Hoping to restore some sanity to the discussion, Mansueto makes several arguments in his highly informative Twitter rant.

“To reach the primary budget goal, we need to cut expenditures and/or search for extraordinary revenues. The goal needs to be realistic.”

After explaining how surplus/deficit goals are estimated and defined, he states that for years, the Brazilian government adopted an economic policy in which spending growth exceeded revenue growth. This started during the first Lula administration and accelerated in his second term and in the administrations of his successor, suspended president Dilma Rousseff, who is facing impeachment for allegedly cooking the government’s books to conceal the size of the deficit that had been created in the run-up to her reelection.

“The legacy of low growth of more than seven years of disastrous economic policy does not allow for a speedy economic recovery.”
“At the end of the first Lula government, the entire fiscal surplus of 2003 was lost in the subsequent years and the primary went back to what it was in 2002.”
“And after 2006, there was a practical fiscal party that began in 2008/2009. One of the greatest problems was the strong expansion in the gross debt”
“The government increased the public debt by almost 10 points of GDP from 2007 to 2014 to subsidize, in some cases, companies that didn’t need it.” 

This situation is made ever more complex by the biting recession, the worst since the 1930s, if not ever. Given the potentially negative economic effects of austerity measures, to attenuate the effects of the budget cuts and tax increases needed to solve the problem, these need to be implemented slowly and gradually to keep the economy from imploding even further.

“Another suggestion was to immediately revert payroll taxes to previous levels (these taxes, which fund social security, had been decreased in recent years). Seriously? In a context of recession, would this be an adequate measure? No.”

Further, Mansueto also notes the need to pay for liabilities from the previous government, which cannot be neglected, as well as the lag between when changes to fiscal policy are made and when the benefits from these changes can be reaped.

“The bill for the years of wrong economic policy has arrived. This bill will not be paid in just one year. But it is possible to recover.”
“The bill for subsidies of R$ 30 billion in 2016 and 27 billion next year are to pay for the programs of the previous government. There is no way to not pay them.”
“Government revenues respond with a lag to economic growth. Look at 2010 when the economy grew by 7.6%. The effect on tax revenues collected only came in 2011.”

Finally, he highlights the political difficulty of fiscal adjustments in general, an especially important issue given the tenuous situation of the present interim administration, and specifies the measures in a proposed constitutional amendment to limit government spending that would help rectify the situation in the future.

“The fiscal adjustment has already begun. The rules of the PEC (proposed constitutional amendment to limit public spending) for 2017 and 2018 would lead to a decrease in the primary expenditure of at least 0.5 points of GDP per year.” 
“If the PEC limiting spending growth is approved, the primary expenditure as a % of GDP will begin to decrease every year, starting already in 2017.”
“According to the rules of the PEC, if consecutive years of successive decreases in expenditure (as a % of GDP) is not a severe fiscal adjustment, I don’t know what is.” 

All of these factors need to be taken into consideration to create a realistic goal, and it is important for people to realize that there will not be any miraculous solutions. Indeed, these issues are very complex and there is fierce debate about this internally within the government beyond the dissenting voices coming from outside. Whereas Mansueto states that Brazil should not “revert to the old formula of raising taxes,” the administration has already announced that it will raise taxes on fuel and is considering other tax increases. Even so, the deficit goal, which should be announced shortly, is still expected to surpass R$ 150 billion, possibly even beating the current record of R$ 170 billion, certainly not the outcome some were hoping for.

**UPDATE: The figure for the projected budget deficit for 2017 has been released: the primary budget deficit goal is R$ 143 billion, slightly lower than previously expected. This figure counts on a return to economic growth next year, with GDP forecasted to grow by 1.2%, after two successive years of contraction, leading to more tax revenues. In addition, the state will raise money by cutting spending and selling off assets. Tax increases have also not been ruled out. 

Read a translation of the full Twitter rant below:

“Understand the budget in Brazil. Everything begins with the LDO (law of budgetary directives), which is sent to Congress in the month of April with the primary result goal.”
“With the definition of the primary budget goal, the Central Bank estimates the trajectory of the gross and liquid debts (Dívida Bruta e Liquida) of the public sector that are in the LDO.”
“For the National Congress to begin its recess on the 17th of July, it must first vote on the LDO. If it doesn’t vote, the recess doesn’t begin.”
“This month, the Temer government needs to send Congress an amendment to the LDO of the previous government.”
“The definition of the new primary budget goal for 2017 involves complex simulations of the revenue side. The planned expenditure will have zero real growth.”
“Once the revenues are defined based on projections for GDP, inflation, salaries, etc., the economic team and government define the primary budget goal.”
“To reach the primary budget goal, we need to cut expenditures and/or search for extraordinary revenues. The goal needs to be realistic.”
“The fiscal debate is confused and some people’s suggestions to improve the primary goal are not politically viable because the population does not want them.”
“One analyst’s suggestion: ‘Just need to correct social security benefits to below inflation’. Seriously? Who is going to approve this madness?”
“Another suggestion someone sent me: ‘Just need to approve a full CPMF (a proposed tax on financial transactions) of 0.38%.' Will the population and the politicians like this idea?”
“Another suggestion was to immediately revert payroll taxes to previous levels (these taxes, which fund social security, had been decreased in recent years). Seriously? In a context of recession, would this be an adequate measure? No.”
“The legacy of low growth of more than seven years of disastrous economic policy does not allow for a speedy economic recovery.”
“The fiscal adjustment has already begun. The rules of the PEC (proposed constitutional amendment to limit public spending) for 2017 and 2018 would lead to a decrease in the primary expenditure of at least 0.5 points of GDP per year.”  
“According to the rules of the PEC, if consecutive years of successive decreases in expenditure (as a % of GDP) is not a severe fiscal adjustment, I don’t know what is.”
“Is it possible to make a very fast fiscal adjustments of 5 points of GDP in two years without increasing taxes? No. Has any country ever done that? No.”
“The bill for the years of wrong economic policy has arrived. This bill will not be paid in just one year. But it is possible to recover.”
“The bill for subsidies of R$ 30 billion in 2016 and 27 billion next year are to pay for the programs of the previous government. There is no way to not pay them.”
“Challenge: take the data from the Treasury and find two years of decreases in primary expenditure as a % of GDP. It doesn’t exist. But if the PEC is approved…”
“If the PEC limiting spending growth is approved, the primary expenditure as a % of GDP will begin to decrease every year, starting already in 2017.”
“Don’t believe in magical solutions. The last people that did that are being investigated by the TCU (Brazil’s highest fiscal accounting court).”
“Let’s talk about fiscal adjustment? Let’s look at our history of adjustments after the Real plan (new currency implemented in the 1990s in response to hyperinflation). Starting point is 1997, when the Treasury data series begins.”
“In 1997, the central government had a primary of 0.2% of GDP, or -0.2% of GDP for the Central Bank. How did we make an adjustment?”  
“From 1997 to 2002, the primary revenues of the central government increased from 14.2% to 18% of GDP. And the primary expenditure from 14% to 16% of GDP.”
“From 1997 to 2002, the government increased taxes and the CPMF. The government made important structural changes, but the adjustment came from taxes.”
“From 1997 to 2002, the central government increased the primary surplus by 2 points of GDP but with revenues increasing at double the rate of the primary expenditure.”
“From 1997 to 2002, the primary expenditure increased by 2 points of GDP each year. This cannot be done now.”
“The fiscal adjustment now needs to come from the expense side, and therefore needs to be gradual. But this is what everyone wants.”
“The PEC to limit public spending, for the first time, makes it possible to do a fiscal adjustment from the expense side. But this will not happen in one year.”
“It is illusory to expect a rapid recovery of the budget coming out of two years of falling GDP for growth that the market estimates at between 1-2%.”
“Government revenues respond with a lag to economic growth. Look at 2010 when the economy grew by 7.6%. The effect on tax revenues collected only came in 2011.”
“Let’s look at other years with fiscal adjustments in Brazil. Let’s go to 2003, the first year of the Lula government, with several friends of mine in the government.”
“What was the fiscal adjustment in 2003? Almost nothing. An attempt at 0.5% of GDP with a 50% drop in investment and delayed payments.”
“From 2002 to 2006, the primary expenditure of the central government went from 15.9% to 16.8% of GDP and the liquid revenues from 18% to 18.8%. There were no adjustments.”
“At the end of the first Lula government, the entire fiscal surplus of 2003 was lost in the subsequent years and the primary went back to what it was in 2002.”
“And after 2006, there was a practical fiscal party that began in 2008/2009. One of the greatest problems was the strong expansion in the gross debt”
“The government increased the public debt by almost 10 points of GDP from 2007 to 2014 to subsidize, in some cases, companies that didn’t need it.”
“The fiscal adjustment needs to come from cutting expenses. We can no longer repeat the old formula of increasing taxes.”
“The government is proposing a law for regulatory agencies. It would strengthen agencies. This is essential to take back concessions and for privatization.”
“I’m going now to begin my 12-hour workday. Hugs to everyone.”