The last several months have seen President Michel Temer’s reformist agenda halted due to the corruption charges levied against him. The inability to move forward on reforms that would address the country’s fiscal issues has only exacerbated the economic crisis. However, Temer is now clear from the two indictments that had been filed against him. The House of Representatives voted to reject the indictments and barring any new accusations Temer will likely finish his term.
Unfortunately, Temer’s victory will not necessarily lead to his reform agenda moving forward with the same momentum as before the indictments; nor will it the end the political crisis. Temer’s administration had to concede some of its most ambitious proposals to secure the votes needed to reject the most recent indictment. Nevertheless, the administration’s focus moving forward will be to implement watered-down versions of his original proposals to i) reign in the fiscal crisis, and ii) improve the business environment.
The primary problem is the fiscal crisis. It was partly dealt with by the ratification of a spending cap late last year. Unfortunately, the country is on its way to surpassing the cap by 2020. The next administration will have to consider proposing an adjustment of the spending cap to avoid exceeding it despite whatever measure is enacted now to deal with the immediate crisis.
However, the situation is dire and the administration will need to move quickly to maintain solvency since spending cuts alone will not suffice. To that end, the government is attempting to bring in revenue through various measures. A pension reform that encompassed a combination of spending cuts and tax increases had been proposed but eventually collapsed due to the accusations against Temer. A recent study by Fundação Getulio Vargas estimates that if the tax margin falls below BRL 70 billion, “The government would suffer a general paralysis.” Furthermore, the Independent Fiscal Institution estimates that without pension reform, the tax margin will reach a low of BRL 65 billion by 2020. Because a full-fledged pension reform is currently unfeasible, the administration will either try to have a law passed that formally increases the minimum age for retirement or they will enact an executive order that informally raises it by tightening access to pension benefits.
To improve the business environment, Temer signed various important measures into law within his first year in office. The list includes the privatization of several state-owned assets, the de-bureaucratization of public services, a law streamlining the regulation of government agencies (proposed), and a governance law for state-owned enterprises. The government also passed a labor reform earlier this year intended to make conditions less restrictive. Furthermore, the administration will attempt to tackle the burdensome tax system. The first stage of the retirement and social security tax – commonly known as PIS/COFINS – reform may be announced as early as November.
Additionally, the lowering of real interest rates and the scaling back of state intervention has already stimulated market optimism as evidenced by the historic market rallies. The key will be attracting investment to create sustainable long-term economic growth. While Temer will be unable to implement all his objectives, the proposals that are considered viable will but begin to set the country in the right direction. What is certain is that Temer will pass on both political and economic crises leaving no easy task for the administration that will follow.