The Brazilian pension reform is finally approved and represents a major improvement to the economy. Cost of the public pension system is by far the most relevant factor in the public sector deficit, which in turn prevents the government from investing and expanding its policy of interest rate reduction.
The reform is expected to save R$800 billion within the next 10 years and, coupled with the public spending limit approved during the term of former President Temer, aims to reduce government deficit and therefore allow to an increase on the much-needed investment in education, infra-structure and other strategic sectors.
Hopefully the recent developments will lay the foundation to a long-lasting period of low interest rate and high growth. But still, that would be just the foundation; much more is yet to be done.
With the pension reform behind us, the country needs to look ahead and focus on the deep-rooted causes of its main problems. Brazil continues to spend much less than necessary on education, investments in research and technology are low, productivity is lower than in similar countries and infrastructure still an issue to a country eager to export its products and gain international markets.
Public spending under control and low interest rates are good starting points, but alone they will not do the job. Sustainable growth, and the much-desired poverty reduction, will only be possible with substantial investments in education and productivity by the current administration and others to come. Given the current public deficit, this seems unlikely; but not for long.
The next reform to be discussed by Congress promises to tackle the government expenses by promoting a vast reorganization of public careers and salaries. The so-called Administrative Reform is expected to be voted by Congress in the first semester of 2020.
Government data reports that, on average, wages of public officials are 96% higher than similar positions at the private sector. In addition, some careers provide for 60 days vacation, plus countless holidays, and it is nearly impossible to discharge low performance public employees. Needless to say, these factors drain money from the private sector and imposes a heavy burden in the entire economy.
Let’s keep an eye on the Administrative Reform; it may represent the most important shift in government spending, as government budgets will finally be relieved from short term expenses and investments in the most strategic sectors will be ready to take off.
Pedro Drummond, partner at Drummond Advisors. Pedro is a dual licensed attorney (Brazil-USA) and focuses on cross-border transactions between the two countries.