Rio de Janeiro: Fiscal recovery or "final solution"?

Soon, we will enter the final semester of the worst four-year period of government in the State of Rio de Janeiro since the pact for redemocratization symbolized by the 1988 Constitution. It is true that this pact was broken by the 2016 coup d'état, whose effects on the denationalization of the Brazilian economy, the dismantling of the institutional fabric in Brazil, and the increase in exclusion and violence are felt, to a great extent, in Rio de Janeiro. However, the situation in Rio de Janeiro, which worsened in a short period (2015 to 2018), passing through the following stages—difficult, critical, dramatic, and chaotic—cannot be attributed solely to the degraded national context. To attribute this accelerated degradation only to factors external to the Guanabara Palace would be to ignore the responsibility of the same political group, led by the MDB, that has been in charge of the government of the State of Rio de Janeiro since 2007.

During the progressive governments of Lula and Dilma, especially from 2007 to 2014, Rio de Janeiro received substantial federal investments, jumping from a remote position to the top of the ranking of states in the Federation endowed with federal resources. In fact, this was the period in which Rio de Janeiro received essential investments for major sporting events: the Pan American and Parapan American Games (2007), the World Cup (2014), and the Rio Olympic and Paralympic Games (2016). Simultaneously, resources from royalties and special participations increased significantly with the growth in oil exploration and production, particularly with the advent of the pre-salt layer. These were supposedly prosperous times, but were poorly utilized by the state government. For example, during this period of significant liquidity in the Rio de Janeiro economy, the state failed to structure a strategic economic and social development project that would invest, in a planned and sustainable way, in the diversification of its economic arrangements. With the exception of the metal-mechanical sector, heavily concentrated in the southern part of Rio de Janeiro state, and the brewing industry, there have been no significant efforts to address the "hollow structure" that still characterizes the industry in Rio de Janeiro state, as highlighted in the analyses of economists Mauro Osório (UFRJ) and Bruno Sobral (UERJ).

Even so, the expansion of those sectors was largely based on an irresponsible policy of tax exemptions, since it lacked criteria, transparency, and methodology for monitoring the economic and social benefits resulting from the differentiated tax treatment. I hasten to say that tax exemption is not inherently bad, nor should it be "criminalized." When practiced in a planned and responsible manner, it can effectively induce development in a particular region or area of ​​the economy. However, marked by cronyism with campaign financiers and transformed into a veritable fiscal favor, the tax exemptions granted between 2007 and 2014 constituted a "fiscal spree," against the interests of the people of Rio de Janeiro. Not satisfied, the Pezão government has innovated by creating a new monetary unit in Rio de Janeiro, namely, tax compensation. For this reason... 

Through this mechanism, the government of Rio de Janeiro rushes to pay its debts to large companies that supply or provide services to the State of Rio de Janeiro, by offsetting state taxes (notably ICMS) not collected by these companies (overdue tax debts) or, surprisingly, state taxes that they would collect in the future (future tax debts). This is done without even the diligence of negotiating discounts on the debts to be paid with these companies, creditors of Rio de Janeiro, as is done, for example, in so-called reverse auctions, where the Public Authority prioritizes payment to creditors who offer the largest discounts.

Also part of the misguided decisions of the Rio de Janeiro state government during that period were the operations to anticipate revenue with international financial agencies, including "vulture funds," offering future resources from the oil economy as collateral. Now, these resources are the main source of capital for the state's pension system, which is already debatable, since fixed expenses should not be financed with unstable revenues. Furthermore, oil, being a commodity, has its pricing fixed according to the dynamics of the international market. Therefore, it is a variable that is not under the control of the Rio de Janeiro government, which found itself in dire straits when the price of oil plummeted at the end of 2014, a phenomenon that I have already classified, in another publication, as economic and geopolitical, within the context of the current accumulation crisis of the capitalist mode of production.

Without cash flow, indebted, defaulting on payments to public employees, and demoralized by numerous, many already confirmed, allegations of robust corruption schemes within the state's public administration—symbolized by the multiple convictions imposed by the courts on former governor Sérgio Cabral, the main leader of the political group that has governed Rio de Janeiro since 2007—the current Pezão administration has decided to "solve" Rio de Janeiro's problems by adhering to a fiscal recovery regime imposed by the illegitimate federal government, which is also facing serious economic difficulties. It even seems like a new kind of "final solution," in which the "broken" government of Rio de Janeiro adheres to a recessionary regime set by the "torn" federal government. As a first consequence of adhering to this regime, the state government, which had already invented, by decree (later enshrined in law), the concept of "calamity in financial administration," without constitutional provision, submitted itself to federal intervention in the state's economy, now governed by a triumvirate (Supervisory Council) formed based on Complementary Law 159/17, which regulates the states' adherence to the fiscal recovery regime. In other words, Rio de Janeiro is, strictly speaking, under two interventions: in the management of public finances and in the management of public security. Governor Pezão no longer has control over these two strategic areas. Indeed, there are signs that he no longer has control in any area.

Regarding the rules imposed on Rio de Janeiro by the fiscal recovery regime, we have the conventional recessionary model: squeezing public services (civil servants and services provided to the population), currently subjected to the greatest offensive in Rio de Janeiro's recent history; selling, at bargain prices, the last profitable state-owned company, CEDAE, placing water and sanitation in Rio de Janeiro under the logic of commodity and profitability; drastically reducing investments in higher education and research, also following the model dictated by the usurper federal government, which attacks the scientific park and, with it, national sovereignty; and authorizing the ailing Rio de Janeiro to incur more debt (a Trojan horse): as a result, Rio de Janeiro's net consolidated debt now significantly exceeds 200% of its net current revenue, as established in the Fiscal Responsibility Law. In exchange for this recessionary rigor, how much does the Union allocate to Rio de Janeiro? Not a single cent! It only suspends for three years (renewable for an equal period) the payment of the debt that Rio de Janeiro has with the Federal Government. But the debt continues to accrue, including interest, meaning it's a ticking time bomb, with a deadline to explode in the lap of the economy and the population of Rio de Janeiro!

*Originally published in Every WordJune 2018.