Misinformation about state debt masks federal theft.

Paulo Rabello de Castro is one of those liberal economists (he rejects the prefix "neo") with whom one can converse without losing one's sense of humor. He effortlessly combines economic orthodoxy with a good dose of developmentalism, something that doesn't happen among ideological neoliberals. But Paulo Rabello has just written an article in JB about state debt marked by generalized prejudices, following the worst Brazilian custom of talking about everything and everyone with a precarious informational base and conceptual foundation.

Although he presents himself as an expert on state debt, I will challenge him based on my own expert knowledge of the subject. Two years ago, I wrote the book "Settling Accounts: The Zero Debt of the States," where I show that the main cause of the financial crisis in almost all states is the debt that was unjustly imposed on them by the federal government back in 1997. Paulo, on the contrary, believes that the crisis is fundamentally due to the misappropriation of resources and administrative incompetence.

It is astonishing that, out of all 27 states, at least 17 are in open financial crisis, or close to it. Therefore, it is unreasonable to believe that all the historical governors of these states were thieves and incompetent. Someone like Paulo, who has political aspirations, cannot subscribe to the stupidity of the common people who consider every politician a thief. There was something common in these states that justifies the current situation of financial chaos. In my understanding, as I explained in the book, the common cause is the debt imposed on them by the federal government. A debt that I consider negligible.

Before detailing how this happened, I want to address another of Paulo's observations. He is fascinated by the virtues of the Fiscal Responsibility Law, which established limits on personnel expenses and on the indebtedness of states and municipalities. Perhaps this will disappoint him as well. When this law was about to be approved, I gave a lecture at the Superior War College in Rio, pointing out that the law, if sanctioned, would impose a financial dictatorship on the states. Elio Gaspari was at the table and thought I was exaggerating. I wasn't. The public financial system in Brazil serves every purpose except financing development.

It is known that the annual maintenance of a hospital or school costs approximately the same as the cost of its construction. If the administrator builds a hospital within the limits of the Fiscal Responsibility Law (LRF), within the limit of personnel expenses, he will naturally have to equip it. If he does so, he will be spending the annual cost of a hospital, especially on personnel. But his personnel expenses will be limited by law. Of course, this expense can be offset by increased revenue. But if revenue falls, he has to close the newly built hospital to comply with the legal norm which, stupidly, does not recognize the economic cycle or the tax cycle.

Now let's address the crisis facing the states. Due to an imposition by the IMF, the FHC government decided to push for the closure and privatization of state commercial banks. The states' debt securities, rolled over daily in these banks, were consolidated and transferred to private banks and paid to them, without discount, by the Federal Government. Up to that point, it seemed like a normal operation to "relieve" the states of their debt securities. However, in what I consider a fraudulent operation, the debt paid without negotiation with the banks was transferred back to the states, for payment in annual installments to the Government, supposedly over 30 years.

The consolidated debt thus amounted to R$ 111 billion. By 2016, the states had paid R$ 297 billion, extracted from their taxpayers. Despite these payments, R$ 503 billion remains to be paid. The impossibility of this payment by the states is evident. However, if they do not pay, their participation in federal funds will be blocked and their access to credit will be prevented, in addition to other penalties. To many, it seems reasonable that the debt should simply be cancelled. But that is certainly not enough. The federal government has to return to the states what was unduly taken from them. We have a plan for this money. I will explain it in due course.

The fact is that the Federal Government could not have transferred the debt to the States. From a federal perspective, what it paid to private banks with public bonds (or even monetary issuance) settled the debt. These bonds were a liability of the entire society, therefore, of the citizens of the States and Municipalities. It makes no sense for the same citizens to pay the debt again. This may not be well understood by a market economist. But for a political economist it is obvious.

It's important to understand that what the states paid over the years isn't just an accounting matter. They were burdened with liabilities without corresponding assets. After all, the debt being rolled over in the overdraft facilities of state banks no longer corresponded to any productive investments. It was a debt largely created by the Federal Government with its extortionate overdraft rates. Even so, as long as it could be rolled over, it didn't represent a burden on state budgets, which sought alternative sources of financing.

Beyond the accounting aspect, what is stolen annually from state taxpayers in debt management is not just resources from state-owned companies channeled to the Federal Government. In reality, it's resources taken from public budgets as a kind of disinvestment in health, education, and security—the three main functions of the states. And don't tell me that corruption is more important in explaining the crisis. According to the courts, everything Cabral stole in bribes and overbilling didn't reach R$ 300 million. Meanwhile, the state of Rio alone will have to pay more than R$ 8 billion in debt this year!

*This column is dedicated to the Fraternity Campaign, whose theme this year is "Fraternity and Public Policies."