The demonstration of little appreciation for the health of public accounts led to dollar to hexa (R$ 6) and the interest to hepta (IPCA+7% in inflation bonds, case of 2029). The NTN-B that matures in 2035 rose from 6.90% – note that this only happened in 4.4% of 3,676 days in which this title has been under negotiation since 2010; the last, 9 years ago, in the apocalyptic throes of the Dilma government.
Let’s get to the biggest reason behind this.
There has been a lot of talk about the importance that solid institutions represent for building prosperous nations – because this is the focus of the work of Daron Acemoglu, Simon Johnson and James Robinson, the trio that won the 2024 Nobel Prize for Economics.
“Sound institutions” are the classic pillars of successful democracies: independent judiciary, free press, a serious congress… You know. But it’s not “just” that. Other civilizational institution is the currency. Strong countries have solid currencies.
Monopoly Money
As Brazil knows well, building a solid currency is an ant’s job. What guarantees a currency is the public’s confidence in its value. When this confidence dissipates, inflation spirals out of control. And what guarantees such security?
In large part, the faith that the government will keep the issuance of new money under control, in good times and in bad, in health and in sickness – since the production of currency in an uncontrolled way creates hyperinflation (a problem that Brazil has experienced to a large extent). acute in the 1980s and 1990s, when it experienced annual inflations of more than 1,000%).
And then we come to the tax issue. You can only be sure that the issuance of money (and inflation) will continue under tight control when the State, owner of the money printers, takes care of its own accounts. In other words, avoid spending more than you earn.
Extra spending, when it occurs, is covered with debt that the government contracts by selling public bonds. So far, normal: every country does this. The problem is when the debt becomes too large. There comes a time when you begin to doubt your solvency capacity. Confidence is lost that the government will be able to reduce debt with what it collects in the form of taxes.
And suspicion is growing that, sooner or later, the government will have to produce new money to pay its trillion-dollar debts – which would transform the country’s currency into Monopoly money. That’s what happened in Argentina. The country down there spent years paying its internal debt, in pesos, simply by issuing pesos – and this destroyed the local currency.
Which brings us to Brazil at the end of 2024.
The unsustainable fiscal lightness
It is understood that a debt equivalent to 60% of GDP is at a healthy level. 10 years ago, ours was at 56%. Legal. But in 2022 it had already reached 71.7% – beyond the red line.
It would be time to make fiscal efforts (cut spending; increase revenue) to get things back on track. But precisely the opposite happened. Public debt began to grow at the rate of a country at war. At the moment, it is at 78.5% of GDP, and according to the Independent Fiscal Institution (IFI), a Senate body dedicated to this type of calculation, it will close 2024 at 80%.
It would be time for the government to announce a solid package of spending cuts; signal that, yes, it knows that maintaining faith in public accounts is essential. But no. Haddad waved a shy package.
And worse.
Bumbling Robin Hood
The government ended up transforming the long-awaited moment of announcing the cuts into the news of a tax waiver: yes, the income tax exemption for those who earn up to R$5,000 – in exchange for a “minimum tax” of 10% on those who earn more than R$50,000 in the form of profits and dividends, and you don’t pay taxes for it as an individual (although you do so as a legal entity, but that’s another story).
The measure, in itself, has a civilizing tone, given the violence of inequality here: 92% of IR taxpayers in Brazil earn less than R$5,000.
But everything indicates that the government missed the start. He used a moment when he should calm the market (which is the creditor of his debt) to make his “income transfer” announcement – without making it clear whether the impact of R$35 billion on the accounts can really be canceled out by the eventual tax minimum for the top of the pyramid.
In other words: it transformed something that should have been a technical measure, in favor of an essential institution (currency), into an episode of class struggle.
It is natural for a center-left government to focus on the Robin Hood part. But he put on the costume at the wrong time: at a time when Nottingham (Robin’s city) is on fire.
Let there be fire, with the dollar rising and interest rates testing new limits. In essence, it is the fear that fiscal neglect will end up turning our currency into Monopoly money. Again.
