This is Part II of a five-part series entitled What now? The trade-offs and budget cuts needed to fix Brazil’s finances. Part II examines the government's provision of subsidies and tax breaks to companies in Brazil, as well as the indirect subsidies provided to wealthy individuals through the country's educational system.
As Brazil’s interim government looks to balance the country’s accounts in light of the record R$ 170 billion deficit expected for 2016, there is no shortage of viable candidates for cuts. Although some have suggested paring back Brazil’s social programs, there are several more promising low-hanging fruit. For example, while Bolsa Família, Brazil’s premier social welfare program, has a modest annual budget of about R$ 28 billion, roughly ten times as much is earmarked for subsidies and tax breaks to corporations. These corporate benefits, sometimes referred to as “Bolsa Empresário” or “Corporate Welfare,” add up this year to about R$ 270 billion. Although some of these incentives may in fact help create jobs and generate economic growth, a lot of it ends up lining the pockets of people who are already unbelievably wealthy.
Tax breaks or subsidies to certain industries or companies are common measures of public assistance to private sector development, and there are myriad examples in Brazil. Indeed, beneficial tax regimes and other subsidies are given to ports, chemical companies, oil companies, wind turbine manufacturers, and agribusiness companies, to name a few. The justification for this largesse is that it is intended to help the less developed Brazilian industries and regions. However, the fact that 52% of the funds go to Brazil’s most developed region, the southeast, indicates that much of the funds are going to places that probably don’t need any help.
An even bigger problem of late has been the provision of subsidized loans to large companies. After a 2007 policy went into effect, the Brazilian Development Bank (BNDES) and other public banks began offering such loans, which charged interest well below market rates. The value of these subsidies jumped from 0.4% of GDP to almost 10% per year, to the point that the market share of public banks now exceeds that of private ones. As a result, the BNDES now lends out more than even the World Bank.
Indeed, a major contributor to the 2015 budget deficit (the previous record holder, before the 2016 estimate blew it out of the water) was caused by the repayment of the off-balance sheet debts, known as “pedaladas fiscais,” for which suspended president Dilma Rousseff is being impeached. Although she has often stated that these illegal accounting maneuvers were done to pay for social programs, the fact is that much of the “loans” obtained through the “pedaladas” were used to fund the BNDES loans. Although the money was supposed to help Brazilian entrepreneurs and SMEs, huge amounts of below-market-rate loans ended up going to large companies. Notable examples include Odebrecht, the largest construction company in Latin America (and the company at the center of the Petrobras web of corruption, as uncovered by the Car Wash investigation), and JBS, the largest meat exporter in the world, which was the single greatest beneficiary of the program. Meanwhile, the Brazilian Treasury, i.e., the taxpayer, is on the hook for the difference between the subsidized interest offered by the BNDES and the market rate. It clearly makes no sense for the government to provide assistance to already successful, billion-dollar companies. These funds could be much better used elsewhere.
Government assistance to large corporations aside, there are many other ways in which the government subsidizes the wealthy. One salient example with long-lasting consequences is the way the government approaches the country’s educational system. For example, public universities, which can accommodate only 25% of college students, are free; remaining students must pay for private universities. The problem here is that the public universities, which are the most competitive and prestigious, are generally inaccessible to those who have not received private primary and secondary education: the public university entrance exams are just too hard and public schools are generally too poor in quality to prepare students for them. Even kids who went to private school sometimes have to take an additional year or two of specialized review courses (also private, of course) to pass them. So we end up with a situation in which students whose families can afford to pay for them to go to private school their whole lives then get to send their kids to the best universities for free, setting them up to get the best jobs, while those who could not afford private schools can only pass the exams at less prestigious private universities, which they may not be able to afford. And yet, in the past decade, the government has opened 15 more public universities. This hardly addresses the problem: in order for all students to have a fair shot at attending public universities, public schools need to be brought up to the standard of private ones. Simply creating more public universities only further extends the educational subsidy provided to wealthier Brazilians. This is not an efficient allocation of government resources.
This highlights a critical fact about education spending in Brazil: the government generally over-spends on higher education while under-investing in primary and secondary education, all but ensuring that inequality of opportunity will be perpetuated. Providing access to quality public education is one of the few approaches to poverty reduction that has consistently been shown to be successful, and the public school system in Brazil is notoriously inadequate. Indeed, it seems that public education has even deteriorated recently, as would be indicated by the many occupations of public schools by dissatisfied students all around the country. The fact that Brazil’s public education system has not improved demonstrably under the Workers’ Party government is the real scandal here. Brazil is now in dire straits, but there was a time when the economy was booming and the president at the time, Lula, enjoyed almost unlimited political goodwill. Yet, instead of trying to get at the structural roots of systemic poverty, he focused on palliative measures and neglected to address some of its long-term causes, like unequal access to quality education. That is the real scandal here: The squandering of this opportunity to actually effect lasting change is worse than any corruption or budgetary irresponsibility.
Given the gargantuan budgetary constraints the country is now facing, it is likely that the fight to improve public education will once again be put off (indeed, the government has been cutting the educational budget for the past few years in light of the tight fiscal conditions). Students will continue to have to wait, and another generation of people will have grown up without benefiting from access to decent schools and the associated job prospects. Meanwhile, political pragmatism dictates that what little political goodwill remains will be used to push through reforms that will have more immediate effects. A prime candidate is the large amount of money spent on government bureaucracy itself.
The next section of this series will examine likely candidates for cuts in the massive Brazilian bureaucratic machine, including benefits to public sector employees and an unsustainable and underfunded pension system.