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 It's easy to spend other people's money as you will know if you have ever had an expense account. However, it's a different story when someone else is spending your money. President Luiz Inácio Lula da Silva has been doing a lot of this recently and leaving the taxpayer and future generations to foot the bill.
He has just approved wage increases ranging from 5% to 20% for 160,000 public service workers at an estimated extra cost to the public purse this year of 1.4 billion reais (about US$ 636 million). Lula's generosity may stem from his deep-seated feeling that these workers and pensioners deserve their increases. On the other hand, it may be connected with the upcoming presidential election and be nothing more than a massive bribe to win the votes of those who benefit from his generosity at other people's expense. When Lula makes speeches, he often mentions the days when he was still a metal worker and how he and his wife had to scrape by. They could only buy things when they had saved enough money to do so, he claims. He then says that the country should do the same and spend within its means. This was how Margaret Thatcher, another politician with a simplistic view of the world, used to talk but Thatcher actually put her words into action. Lula has been not been consistent. On one hand, he has handled the economy responsibly - giving the Central Bank freedom to set interest rates and not meddling in the currency market to check the appreciation of the real - but on the other hand he has done little to check higher spending. The bill for the latest pay rises will increase even more as various other public employees demand and get their share. The military, for example, is expected to receive a raise of 10% in August, which will cost an additional 1.2 billion reais. One report says the total increase could be as much as 7.6 billion reais. This move follows the decision to increase the minimum wage from 300 reais a month to 350 reais - an impressive rise of around 16%. This, in turn, will push up the pensions of retired public workers which are linked to the minimum wage. Other sweeteners include a 20% rise in the Bolsa Família social program which encourages poor families to send their children to school. Over nine million families currently benefit from this program and the government is studying how to add another two million families. The construction and farm sectors have also benefited from packages worth around 18.7 billion reais and 13.4 billion reais respectively. The government would deny any link with these measures and the election since the law says that increases in spending in an election year must be made until June 30. Few people would believe this just as few people believe Lula has not yet made up his mind whether to stand. His style of governing is to avoid tough issues and spend his time flying around the country, opening infrastructure projects and addressing public meetings which are almost like election rallies.
Day of Reckoning Beckons The day of reckoning must come. Government spending is rising by around 10% a year. At this rate, it will start becoming more difficult to achieve the target of a primary surplus of 4.25% of GDP. The target seems achievable this year since the main effects of this new spending will only apply to the second semester. However, if the government is to meet this target in coming years it will either have to cut back on spending or borrow more, since there is no fat left on the taxpayer, individual or corporate. Since most state spending goes to plugging the deficit in the public pensions account, productive areas which desperately need funds, such as infrastructure projects, will have to wait. This imbalance also affects Brazil's image abroad and means the country is still some way from obtaining investment grade status. I recently attended a conference in São Paulo organized by Moody's Investors Service ratings agency and this was the main point stressed by one of Moody's executives. He pointed out the great strides Brazil had made in recent years, such as reducing the foreign debt from US$ 235.4 billion in 2003 to US$ 187.9 in 2005, improving the profile of the foreign debt and converging towards peer countries with investment grade such Mexico and South Africa. However, he made it clear that unless the fiscal problem was tackled it would be some time before Brazil received investment grade. Readers who are not familiar with finance should know that receiving investment grade is not just a pat on the head for good behavior but brings a significant advantage in negotiating interest rates from foreign lenders. A better investment grade means cheaper loans. This is why the progress Brazil has made in cutting its foreign debt is so important. Endemic Corruption Finally, another reason for being concerned about public spending in Brazil has nothing to do with financial statistics but efficiency and morality. Vast amounts of money destined for public works are used inefficiently or siphoned off by corruption. Hardly a day goes by without newspapers printing articles on the latest cases of corruption. Political life in Brasília has been overshadowed by the "bribes for votes" corruption scandal for the last year. The Estado de S. Paulo newspaper recently featured an article based on a report of the body (CGU) which oversees the federal public accounts. An audit by this body identified corrupt practices in 77% of all municipalities in the country. It mentioned eight states in which every single municipal government showed serious problems involving corruption. In one case it said federal resources destined for flood relief victims had been used to build houses for employees of the municipal government. Much of the extra money big spender Lula is currently doling out will go the same way. John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at
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. © John Fitzpatrick 2006
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