Economists support Minister Tebet’s plans to separate social security from health and education spending floors

05/07/2024

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Carlos Kawall — Foto: Silvia Zamboni/Valor

Decoupling the increase in the minimum wage from social security and welfare benefits, as well as unlinking the spending floors for health and education from revenues, are considered priority measures to ensure the sustainability of public debt. While these measures are deemed essential to prevent the economy from being overwhelmed by revenue demands, their political feasibility remains uncertain.

In a recent interview with Valor, Brazil’s minister of Planning and Financial Budgeting Simone Tebet expressed her support for separating Social Security from the minimum wage, which is currently adjusted in real terms. Last week, Finance Minister Fernando Haddad highlighted an article on the social network X (formerly Twitter), written by economist Bráulio Borges, which advocates for detaching the social security floor from the minimum wage as a strategy to reduce federal expenditures. This article was published by FGV Ibre’s Fiscal Policy Observatory.

Carlos Kawall, founding partner of Oriz Partners, believes that Minister Tebet’s comments indicate that mere spending reviews are insufficient for fiscal consolidation, suggesting that deeper spending cuts are necessary. He noted, “We have created overly flexible rules that accommodate increased spending in a manner incompatible with economic growth and public debt sustainability. We cannot generate the necessary revenue to support this spending without stifling the economy.”

Social security expenses currently represent more than 40% of the government’s total revenue and are its most significant expenditure, according to Silvio Campos Neto, economist and partner at Tendências. He referenced a study from the Ministry of Finance indicating that for every R$1 increase in the minimum wage, there is a nearly R$400 million rise in spending on social security and benefits, such as the Continuous Cash Benefit (BPC)—a welfare program for the elderly or disabled who lack sufficient income—and the salary allowance, which annually provides additional financial relief to low-income workers. “Considering the forecasted real adjustments from 2023 to 2026, we’re looking at an accumulated increase of around R$150 billion, driven by the policy of raising the minimum wage and linking it to benefits,” he explained.

In the article endorsed by Minister Haddad, Mr. Borges contends that a key strategy to curb social security spending would be to detach the pension floor and other welfare benefits, like the BPC, from the national minimum wage, recommending that pensions be adjusted for inflation. Mr. Borges also suggests that criteria such as the minimum retirement age and minimum contribution time should not be static but should automatically adjust according to changes in life expectancy as calculated by the IBGE.

Mr. Kawall believes adjusting pensions and welfare benefits for inflation could be a viable middle ground in the debate on decoupling from the minimum wage, allowing greater flexibility in spending and making any real adjustments discretionary. He also emphasizes the need for parametric reforms in pension grants, noting, “This would be a relatively simpler reform, as the fundamental change of linking it to age was already enacted in 2019.”

Mr. Kawall acknowledges that while the recalibration of retirement ages and contribution times is necessary over time, its effects will not be felt for 10 to 15 years. “In the short term, the real increase in the minimum wage expands the base of the pyramid, which will become unsustainable over time. There won’t be time for the structural changes of recalibration to take effect. In the short term, breaking the link with the minimum wage is more critical,” he explains.

Mr. Kawall also highlights an important aspect of Ms. Tebet’s statements regarding the minimum spending thresholds for health and education. These thresholds lead to a dynamic of real growth in spending in these sectors, which conflicts with fiscal sustainability in the medium and long term. The connection between federal revenues and health and education spending stems from the so-called Transition Amendment (EC 126/2022)— a constitutional amendment in Brazil that was enacted to adjust fiscal and budgetary rules. By repealing the spending ceiling and other expense correction mechanisms, it reinstated previous rules that link health spending to the growth of net current revenue (RCL) and education spending to net tax revenue.

“In education, the minister initiated an innovative discussion about including Fundeb in the education spending,” Mr. Kawall noted. Fundeb is a funding mechanism designed to support public education in Brazil. He also notes that the constitutional minimums for health and education impose constraints not only on the federal government but also on states and municipalities.

Felipe Salto, chief economist at Warren Investimentos, expresses concern that Minister Tebet does not appear interested in making significant changes to health spending. “She doesn’t seem inclined to alter anything. And there’s an issue with the constitutional floor for health [spending], which is already compressing discretionary spending,” he pointed out. “Health spending is high and inefficient. It is not assessed, and there is constant pressure for more spending without proper assessment.”

Coupling social security benefits to the minimum wage or tying health and education spending floors to revenue metrics has placed significant strain on the budget, according to Fábio Serrano, an economist at BTG Pactual. However, he notes, “The issue is very politically sensitive, even though it makes sense from an economic perspective.” He believes there is insufficient political support for these changes.

Mr. Campos Neto, from Tendências, shares a similar viewpoint, noting the political challenges such proposals face. “Even though the proposal today comes from within the government, from Planning, and likely has the support of the Ministry of Finance, the political opposition it faces will be substantial,” he stated.

*Por Marta Watanabe, Marsílea Gombata, Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/