BRAZIL-The more things change, the more they stay the same

A brief stop on the land route to Paradise

It is fortunate that the Brazilian Titanic remains dead in the water on its maiden voyage to Paradise. The administration has to temporarily halt its progress over land because of some “unforeseen” problems.

It seems that instead of getting better, things have worsened a bit in spite of the good time everyone had at the week-long (and on-going) party of the passengers. The administration has had to stop to get things back in order and make some budget cuts. It proudly announced that it would chop off some R$50 billion in budget expenses. 

While the passengers were busy reveling, the crew of the ship was busy with the announced task. They managed to find some R$16 billion to R$18 billion of “fat” that could be trimmed. 

Because that was well short of the announced target, the administration postponed the announcement of the cuts until March. One suggestion under consideration is that Brazil withdraw its membership from some international institutions to which it has to pay dues. The country is a member in some 75 international groups but has back-dues to pay in most of them – some dues payment delays dating back 10 years. Unless the country can withdraw without paying what it already owes, the measure could result in more rather than less expenses. In the UN alone, Brazil owes US$283 million! (So much for that permanent seat on the Security Council!).

The situation is now so bad that even the most draconian tax ever invented (the tax on financial transactions – CPMF) is not enough to allow the country to meet its primary budget surplus (i.e. revenues set aside to pay part of the interest burden on the national debt) of 0.5% of GDP.

Analysis:

Let’s cut to the chase on this budget fiasco. The notion of a primary surplus is one of the most ludicrous ways of trying to manage the country’s finances. It’s like managing your credit card by controlling your interest payments while ignoring the balance on which the interest is calculated. 

Every country in the world, except Brazil, manages the nominaldeficit. Doing so makes it possible to manage the interest portion!

For the past 5 years the administration has known that it has a growing deficit “problem”. Every year it wrote a budget that established a “fiscal target” for the primary surplus and every year it continuously reduced the target as the year progressed. The target for 2016 was initially announced at 1.5% of GDP, reduced in negotiations to 0.7%, which was considered “too burdensome” so it was reduced further to a modest 0.5%. Dilma wanted a “moveable goal” of 0.5% to 0% but wound up settling for a fixed goal of 0.5%. Now, even that seems unrealizable. (It would seem that she had no intention of even hitting 0.5% in the first place!). 

Since optimistic announcements followed by pessimistic performance seems to have become the norm for the past 13 years the PT has been in power, we should not be surprised. 

What is disturbing is that Brazil has not yet even begun to work in 2016 and two months are already down the drain.

Meanwhile the leaks continue on the Brazilian Titanic which has yet to set course to Paradise!