Folha columnist calls government action "fiscal voodoo"

247 "I honestly don't know who the government is trying to fool," protests FGV economist and Folha de S.Paulo columnist Alexandre Schwartsman in an article. published this Wednesday with the title "Operation Chacrinha". It refers to one of the most discussed topics at the moment: the transfers of funds made by the government to meet the fiscal target for the year 2012.

According to Schwartsman, the "maneuver" affects inflation in the short term, and the country's growth in the medium and long term. "The additional spending was not directed towards investment, which remains insufficient, but towards current expenditure," he argues. He also accuses some who, despite knowing about this "scheme," end up remaining silent, "perhaps out of a sense of duty."

Read their analysis below:

Operation Chacrinha

It's annoying, I know, and I apologize to the 18 readers for returning to the topic, but since the government insists on repeating the same mistakes, I have to comment on them. On behalf of the 18, I take this opportunity to appeal for new mistakes, please.

Once the request is made, let's get to work. We learned last week, even before the official release of the December figures, that in that month the government resorted not to one, but to several accounting maneuvers to formally guarantee compliance with the fiscal target, around R$ 140 billion (3,1% of GDP), defined by the Executive itself.

According to reports, Caixa Econômica Federal and BNDES have advanced dividends to the Treasury, in an amount close to R$ 7 billion (duly financed... by the Treasury!).

Furthermore, the government is also said to have withdrawn approximately R$ 12 billion from the Sovereign Fund (partly in Petrobras shares, sold... to BNDES!).

If the rare reader has become confused, don't worry: this was done to confuse (not to explain) and, in the end, it makes no difference whatsoever, since these are all transactions between the various pockets of the same government, with the intention of obscuring the obvious, namely, that, despite the promises, the government fell far short of its goal.

There are two sets of consequences. The most obvious is that, despite Operation Chacrinha, there is no escaping the fact that fiscal policy was far more expansionary than normally assumed, particularly by the Central Bank, which, even in December, based its projections on the assumption that the primary surplus would reach "around 3,1% of GDP".

Perhaps there is still someone in the government who will defend this position as a counter-cyclical strategy, that is, a more expansionary policy in years of low growth, to be offset by a more restrictive policy in years of stronger growth.

Except, of course, that such compensation never occurs, otherwise how to explain the persistent growth of federal spending, from 14% of GDP in 1997 to more than 18% of GDP last year?

In the short term, this means higher inflation, even more so given the Central Bank's negligence. It is no accident, therefore, that inflation has stubbornly remained above the target for three years and is likely to continue that way for the foreseeable future.

In the medium and long term, however, in addition to the inflationary issue, growth is also affected. The additional spending was not directed towards investment, which remains insufficient, but towards current expenditure.

In addition to the fact that such spending typically does not translate into increased growth potential for the country, it suffers from the drawback of being virtually impossible to reduce, suggesting that, in order to make room in the budget for the coming years, federal investment will become even scarcer.

Finally, the counterpart to higher spending is heavier taxes, the impact of which on growth is not only obvious but primarily negative.

The second set of consequences is more subtle, though no less important. Over the past few years, the government has abused accounting maneuvers such as those employed at the end of last year, from extraordinary dividends from state-owned companies to the acquisition of oil reserves by Petrobras (in exchange for shares, not money), to operations with BNDES and other tricks.

I honestly don't know who the government is trying to fool. Perhaps it's itself, since any analyst with a modicum of experience can identify the fiscal trickery, even though some, perhaps out of a sense of duty, bravely refrain from denouncing it.

In any case, this only serves to add to the loss of credibility of the institutions. As if the Central Bank's disregard for the inflation targeting regime wasn't enough, we now have the Treasury carefully tearing up the Fiscal Responsibility Law.

We are, it is true, still far from the point where this will become a pathological problem, but we are already on the road that leads there.