Economists linked to Lula want public investment as the engine of growth and a medium-term commitment to debt.

By Bernardo Caram and Marcela Ayres (Reuters) Economists linked to former president Luiz Inácio Lula da Silva (PT) argue that the country should undergo a shift in economic policy starting in 2023, with an explicit relaxation of fiscal rules so that public spending can once again be used as the engine of the country's growth, establishing medium- and long-term commitments to stabilize public debt as a counterpart.

Reuters interviewed six economists, including former high-ranking officials from Workers' Party governments, members of the Perseu Abramo Foundation, and advisors to Lula, who is orchestrating his likely presidential candidacy and is leading in the polls.

Among the converging diagnoses are support for expanding income distribution and infrastructure programs, and defending the environmental agenda as a priority theme in any potential government program. Economists also align in seeking a tax reform that increases taxes on the wealthiest and in criticizing the current privatization model.

The Workers' Party member has been arguing that he is not yet in campaign mode and, therefore, has not appointed a spokesperson for the economy, but has been listening to experts.

Former Finance Minister Guido Mantega, who headed the ministry from 2006 to 2014, says that the formula for the government that will occupy the Palácio do Planalto in 2023 needs to include the provision for emergency spending, even if this entails a temporary increase in public debt.

"In times of crisis, you have to be able to increase debt a little in the short term, in the very short term, so that the economy can then resume growth," he says, emphasizing that he supports changes to the fiscal framework to include a provision that allows for more spending when the economy is not doing well.

Mantega says he will always be an advisor and counselor to Lula, but that he does not intend to assume a ministerial position in a potential PT government.

The former minister states that the spending cap rule puts a straitjacket on the state and that there is still no decision within the party on whether the rule should be changed or revoked. He argues that, if maintained, the legislation should allow, for example, spending of up to 1% of the Gross Domestic Product (GDP) on investments outside the cap.

The view on the need for fiscal flexibility is shared by Nelson Barbosa, Minister of Finance and Planning (2015 to 2016) in Dilma Rousseff's government. For him, short-term expansionary policy should focus on investments and combating poverty, emphasizing that a fiscal commitment is necessary in the long term.

"For short-term fiscal easing to work, it needs to come with a long-term fiscal scenario; there has to be a commitment to a downward debt trajectory," he says.

According to Barbosa, this signal would come not from restrictive fiscal rules, but from measures with a positive impact on public finances, such as a more progressive tax reform. Furthermore, he believes that the economic growth generated by public spending will cause some of that expenditure to return to the government coffers through increased tax revenue.

In contrast to orthodox economic principles and the vision of the current economic team, led by Paulo Guedes, economists linked to the PT (Workers' Party) argue that there will be no inflationary pressure if the government increases public spending. Esther Dweck, who was head of economic advisory and budget secretary at the Ministry of Planning (2011 to 2016), argues that the country currently has high idle capacity and there is no significant demand pressure on prices.

According to her, fiscal rules need to be revised with the aim of making social demand the driver of development.

“We should bring together all the fiscal rules, create a new package that prioritizes the State's capacity to act,” he says. “Above all, we need fiscal rules not to be criminalized, but to be treated like an inflation target; if you don't meet it, you can explain why.”

Luiz Gonzaga Belluzzo, PhD in Economics from Unicamp and advisor to Lula for decades, believes that the current government's discussion about shrinking the state goes against what is observed in the rest of the world. He also considers the social area a priority for government action.

"There needs to be an immediate program to help the poorest people. They keep discussing the spending cap, when it's already being broken behind the scenes. There's no way to respect [the cap], it's a completely absurd concept," he says.

Economist Pedro Rossi, a member of the Public Policy Monitoring Center at the Perseu Abramo Foundation, which is linked to the Workers' Party (PT), states that state investments in social areas, as well as in urban mobility and housing, generate growth and employment, stimulate consumption, and expand the domestic market, which in turn boosts private investment.

He emphasizes that the country should first list its social priorities and then define simple and flexible rules for debt stabilization.

According to economist Eduardo Moreira, former partner at Banco Pactual and advisor to Lula, the country's situation demands the development of "much more aggressive" social programs, with greater income distribution and a larger base of beneficiaries.

"In the short term, the economy will also be supported by income transfer programs that cover the population living in emergency poverty. Money that reaches these groups returns to the economy through consumption," he said.

Tax reform

In discussions about the Brazilian tax system, economists linked to the PT (Workers' Party) want changes in legislation and argue that the wealthiest should pay more. However, there are differing opinions on how to achieve this goal, with some, like Mantega and Rossi, advocating for the taxation of large fortunes and others, like Dweck, for the taxation of inheritances.

A potential Workers' Party government could take advantage of proposals on indirect taxation that are already well advanced in Congress, says Barbosa. The texts negotiated by the current government to reform the PIS/Cofins (social security contributions) and to create a single tax on consumption would be used – the analysis of these proposals is currently stalled in the legislature.

According to him, however, it would be necessary to start the direct taxation reform from scratch, including a review of the Income Tax. "The changes will probably be gradual, discussed and approved in 2023, to come into effect from 2024," he says.

Privatizations

Regarding the sale of government assets, economists advocate halting the privatization plan championed by the current administration, which has been progressing slowly. The assessment is that companies considered strategic should not be transferred to the private sector.

"Making a loss is not a reason to privatize; it signals that the activity is subsidized by society," says Moreira.

Mantega states that the party is not against the private sector taking over certain activities, but says he believes that "everything that was possible has already been privatized."

“Privatization must be decided on a case-by-case basis and with a focus on what benefits the consumer, not just the shareholder. There is a consensus [within the party] that Caixa, Banco do Brasil, Correios, Petrobras, and Eletrobras should not be privatized,” says Barbosa.

Belluzzo emphasizes that the private sector is often unwilling to make certain investments. "A private company wouldn't spend what Petrobras spent to conduct deep-water research," he says.

Business opening

The topic of trade liberalization is being treated with caution by economists close to Lula. The assessment is that there is a risk to national economic activity if the country's opening to foreign trade is done in a disorganized manner.

According to Mantega, Brazilian industry has weakened and lost ground, leaving the sector vulnerable. He believes that excessive liberalization would turn Brazilian industry into a mere importer of parts and equipment.

In Rossi's opinion, Brazil should not unilaterally move towards expanding trade liberalization while advanced economies are protecting themselves, pursuing industrial policy, and subsidizing sectors.

Belluzzo, in turn, argues that the idea of ​​broad trade liberalization is anchored in a view that the market is perfect, which is not the case. According to him, Brazil needs a sophisticated and diversified trade policy, seeking priority partners and showing concern for environmental issues.

Green growth

According to economists, a potential PT government will have to present a green growth agenda as a central point of its administration. According to Mantega, the party will have a "very strong" environmental program.

The Workers' Party (PT) seeks to counter the government of President Jair Bolsonaro in this area, which has conflicts with developed countries and is criticized for its environmental management.

"It is necessary to strengthen an agenda for environmental protection and decarbonization of the economy. All of this can also generate growth and create jobs," says Rossi.

For Dweck, the environmental issue needs to be "central." "Social demands and environmental discussion can be a significant driver of growth," she says.

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