Rousseff Plans for Austerity, Brazil Going Against Global Keynesian Trend

October 11, 2016

On Tuesday, Brazil’s President Dilma Rousseff pled for her cabinet to embrace fiscal tightening and further austerity measures aimed to conquer Brazilian stagflation and “restore business confidence and growth” as she heads into her second term.1 She wants to bring down rapid inflation, about 6.5% annually, lower interest rates and stimulate spending to boost employment and raise incomes.2 In terms of tax policy, Rousseff wants to alleviate the burden on businesses, encourage private sector investment and boost export competitiveness.1 Despite Rousseff’s first-term focus on local business and industry, low consumer confidence has hindered much change in the unemployment rate, currently at 4.7%.3

Rousseff, of the Workers’ Party, has vowed to protect social programs targeted at alleviating poverty, looking to pension and unemployment benefits for fiscal trimming. She pledges cuts will be both widespread and gradual among virtually all government ministries. Her finance minister, Joaquim Levy, has already bumped taxes on fuel and various imports to curve domestic demand and close the fiscal gap.1 Also, electrical power rates are expected to increase as its government subsidies are greatly reduced.4 Labor union protests are expected as the president’s traditional allies feel the pressures of these measures.

Brazil’s economy barely added jobs in 2014 and job creation was at its slowest pace since 1999.3Following the forecast of up to 1.5 million new jobs for last year, the statistic of only about 150,000 new payroll jobs has killed economic confidence for 2015. In December alone, Brazil’s economy shed more than 550,000 jobs, the worst month since December 2008.3 The Brazilian Itaú Unibanco economists have a pessimistic outlook for this upcoming year; “The deterioration in economic acidity is set to keep job creation at low levels, triggering a faster increase in unemployment rate this year.”3 Economists have noted many young adults are deciding to continue their training and education instead of entering the workforce in this time of low employment opportunity.

Inflation is the most popular enemy at this point, up to 6.99% this week from 6.53% at the turn of the new year. The Brazilian government has set a target at 4.5% with a margin of two percent, putting the new statistic beyond the upper limit.5 As the government pursues austerity measures, the economy will likely stagnate and thus curb some of the inflationary vigor. On January 21st, the central bank raised interest rates yet again thrilling investors who can now find rates at 12.25% per year.5

Brazil’s currency, the real, has recovered with respect to the dollar since mid-December, currently standing at about 2.74 reas to the US dollar.5 As interest rates have increased, so has the inflow of dollars, about $USD 2.3 billion in the first two weeks of 2015. Nonetheless, Brazilians have proven that increasing consumer confidence will be a tough policy feat on both economic and political fronts.

Corruption has recently tainted Rousseff’s government following the multi-billion dollar Petrobras scandal involving two former directors of the state-run oil company and various top construction executives providing kickbacks to politicians.1 Rousseff has pledged for punishment of the corrupt individuals, but has demanded that the private engineering firms that stand behind these great infrastructure projects do not suffer and further risk the stagnant economy.

For Rousseff’s voting base, these policies have proved unpopular since retail sales are low and mortgages are more expensive as lending rates have jumped to 9.2%. Economic growth is projected at a mere .32% for 2015 and 1.54% for 2016, leaving members of Rousseff’s own party skeptical about supporting the announced policies.4 Once implemented, pulling out on these austerity policies could kill foreign investment in Brazil, leaving a mark for years to come.

Policymaking in combating recession is certainly the hot topic in the global economy today. As Brazil advances plans to cut back, Greece is threatening to reverse austerity measures applied after the sovereign debt crisis. Last Thursday the European Central Bank pledged quantitative easing, putting the Brazilian central bank at odds with bond-buying Europe. Similarly, Canada, Denmark, India and Turkey have mobilized given forecasts for slow growth and falling oil prices by cutting interest rates to maintain spending levels.2 In “bucking the global trend,” economists caution the dangerous path pursued by the Banco Central do Brasil, warning Latin America’s largest economy could take its second recessionary plunge in two years.2 Dilma Rousseff is standing behind her policy decision as the central bank’s monetary policy committee meets later this week. “This new administration will be totally committed to austerity and honesty.”1


References: 

1) Boadle, Anthony. “Brazil’s Rousseff urges cabinet to back belt-tightening. Reuters via New York Times. Available at: http://www.nytimes.com/reuters/2015/01/27/world/americas/27reuters-brazil-rousseff.html?ref=americas&_r=1

2) “Brazil risks recession as central bank bucks global trend.” Reuters via Daily Times. Available at: http://www.dailytimes.com.pk/business/26-Jan-2015/brazil-risks-recession-as-central-bank-bucks-global-trend

3) Pileggi, Monica. “Brazil barely adds jobs in 2014 in worst year since 1999.” Reuters. Available at: http://www.reuters.com/article/2015/01/23/brazil-economy-employment-idUSL1N0V21DB20150123

4) Lima, Mario Sergio. “Brazil economists raise 2015 CPI, cut GDP for fourth week in a row.” Bloomberg Business. Available at: http://www.bloomberg.com/news/articles/2015-01-26/brazil-economists-raise-2015-cpi-cut-gdp-for-fourth-week-in-row

5) Wheatley, Jonathan. “Job far from done for Brazil’s inflation fighters, even as economy stagnates.” Financial Times. Available at: http://blogs.ft.com/beyond-brics/2015/01/26/job-far-from-done-for-brazils-inflation-fighters-even-as-economy-stagnates/?Authorised=false

 

About Author(s)

Danielle Scalise
Danielle Scalise is a senior undergraduate at the University of Pittsburgh pursuing degrees in Economics and Political Science, with a minor Spanish and certificate in Latin American Studies. She took part in the Pitt in Cuba program in the spring of 2013 and is currently an intern for Panoramas. Danielle is attending Georgetown Law in the fall where she will study international economic law pursuing a career specializing in US/Latin American trade relations.