As of June 30th 1994 we were world`s inflation practical joke. With peaks of up to 8,900% of annualized inflation, we were world`s #1. Well, soccer was better then, but that frankly mattered less for the average Brazilian. As of July 1st 1994 we woke up with a new currency, the Real, and a brand new – and much lower inflation rate. We had finally domesticated the monster of inflation by establishing fiscal responsibility, in the practical day-to-day public financial governance. The Real plan was a dream come true.
As of 2000 the Fiscal Responsibility Act was sanctioned by Pres. FHC. This is the first Revolutionary Law. The strict control of public deficit, as well as the elimination of accounting “magic” such as the FCVS (Fund for Compensation of Salaries Variation – a mechanism in which federal government paid for the differences in the interest rates on housing finance) was imposed, and extinguished and the last bastions of “books cooking” in the country.
This single law changed Brazil`s economy and allowed the boom of the second decade of the century. Well, the rest is well known – later on, fiscal irresponsibility and disrespect to the Fiscal Responsibility Act allowed the legal basis to oust a president power. (these are “the worst economic years since the GDP is calculated in the beginning of the 20th century” according to Finance Minister Henrique Meirelles).
Now a new and spectacular measure is sent to the Congress by the Temer administration – The Second Revolutionary Act – the limitation of public expenditures` growth limited to the last year`s inflation. The impact of this measure alone, and the accompanying measures of mandatory budget cuts, has not been digested by the market as of yet, I think. If approved by Congress, this can definitely put Brazil in the route of a smaller and more efficient central government and a bulletproof cuirass against irresponsible presidents. This can curb the public deficit from the present 57% of GDP to less than 30% in a decade (my personal calculation).
Will Brazilian Congress pass such a radical, though desperately necessary, measure? Hard to tell. However, desperate situations require desperate measures. And that is exactly the moment we live in. My personal view is that Congress will pass the Act. Reasons? Well, the strong basis of support of Pres. Temer in the lower and higher houses is one. The fact that the impacts are not immediate (and therefore do not affect the representatives and senators immediately) is another one – house reps normally guide themselves by the pressures from the streets and their immediate interests. A third reason is the pressure of the financial team Temer has put together (“a team of Pelés” according to one of our leading economists, in a very Brazilian soccer metaphor). This team has strict liaisons to the “market”, and it is making pressure for more conservative financial policies – they know how to pull the market`s strings. I revel in this measure! I really do! I am optimistic that it can turn our economy (and us being upside down already, this is a great thing) and put us back on track.
What else is needed? A lot. A better infrastructure is paramount. More intelligent investments in education are also sorely needed. Better legal landmarks and the passing of the “10 measures against corruption”, proposal with more than 2 million signatures in support of it would help us to prevent spectacular thefts of the public funds from happening again. But that is heaven, and we are not in heaven yet.