The Temer Administration Wants to Put Brazil in a Straitjacket for 20 Years

Older people will suffer with the new budget amendment - Marcos Santos/USP Imagens Brazilian President Michel Temer has been trying to take drastic steps to address the economic crisis in Brazil, most recently through the proposed constitutional amendment (PEC) 241.

PEC 241, should it pass in the Senate with a two-thirds majority, will cap government expenditures and base subsequent years’ spending on each year’s previous budget—2017’s budget derived from 2016’s—adjusting only for inflation.[1]

This cap would last for 20 years, ending in 2037, and future presidents will not be able to modify it without amending the constitution itself.

Temer promotes PEC 241 on the basis of reducing the budget deficit in the hopes that it will allow for an easier repayment of mounting interest on the government’s debt.

Older people will suffer with the new budget amendment - Marcos Santos/USP Imagens

The broader goal of this amendment is to regain and maintain foreign investors’ confidence with the hope that they will invest into the Brazilian economy and stimulate growth.[2]

This strategy is being pursued to keep inflation under control and avoid a future debt crisis — as opposed to increased government spending and lower interest rates — in order to achieve sustainable growth.[3]

In Temer’s pursuit of a comprehensive spending cap on government expenses, he appears to be following a similar path set by his predecessor, Dilma Rousseff.

She had routinely pushed for targeted cuts in a variety of government programs, including education, contradicting the very platform that Rousseff promised to advance during her 2013 reelection campaign.[4]

Rousseff also backed a proposed cap on pension spending and then vetoed several proposed Congressional spending increases on salaries and pension payments in 2015 with the focus on reigning in government expenditure and gaining investors’ confidence.[5]

The difference is that Rousseff was trying to address specific challenges: the education cuts were limited and backed with a focus on reform, and the pension cap addressed the issue of the “pension bomb” that was unsustainable with changing age demographics.[6]

In contrast with Rousseff’s approach, Temer is taking a broad brush and painting across the government, irrespective of the actual problems specific agencies are facing.

Furthermore, the purpose of the constitutional amendment seems to miss the point of why Brazil is facing an economic slowdown. Temer points to the need of regaining investor confidence, surely an important feature in an economy, but does not touch on the fact that domestic consumption has also dropped significantly since 2010.[7]

This article will first expand upon the legal specifics of PEC 241 and discuss the economic conditions that played a significant role in the economic crisis. Then, it will assess key issues that PEC 241 does not address and will inhibit the Brazilian state from addressing in the future.

PEC 241 has five articles (Art.), 101-105, which establish the timeline, agencies affected, the budget definition process, how non-compliance will be dealt with in punitive measures, how it may be altered, and the responsibility of payments.

Art. 101 creates the timeline of “twenty financial years” and expands its coverage to “all powers of the Union and federal agencies with administrative autonomy and financial members of the Fiscal Budget and Social Security, the New Tax Regime” which in effect lays claim over the federal and various branches of government.[8]

Art. 102 goes on to explicitly include the separate branches of government by individually limiting the “total primary expenditure of the Executive, the Judiciary, and the Legislature, including the Court of Audit, the Public Ministry of the Union and the Union Public Defender.”[9]

This effectively encompasses the remaining features of the Brazilian government and puts central government agencies under the expenditure cap. Art. 102 also has several important subscripts, one of which sets the reference point for the 2017 budget, and following budgets, with the “primary expenditure incurred in the 2016 fiscal year adjusted by the variation of the National Consumer Price Index” allowing only for changes in the budget due to inflation.[10]

Subsequently, a subscript states that government primary expenditure cannot exceed the given cap. Another important subscript of article 102 explains that the “President may propose… the adoption of a Provisional Measure… to take affect from the tenth year of operation.”[11] The Provisional Measure allows the president a means of “correction” on the spending limits PEC 241 creates.

Article 103 focuses on limits for “non-compliance” that can simply be seen as penalties for agencies that did not follow the measures outlined previously.[12] The effect of these limits stop the affected agency from taking actions that call for cost increases such as pay raises or increased hiring.

Art. 104 goes on to reinforce the cost savings focus by stating, “the minimum application of resources… shall provide, in each financial year, the minimum application for the prior year adjusted” for inflation.[13]

Art. 105 serves to limit the State’s compulsion on payments by stating, “the New Tax regime does not constitute obligation of future payment by the Union.”[14] As a whole, these articles constitute the legal basis behind PEC 241.

It is necessary to examine Brazil’s economic downturn in order to assess what issues PEC 241 does not address. In a report by the Center for Economic Policy and Research, Franklin Serrano and Ricardo Summa, both professors from the Institute of Economics at the Federal University of Rio de Janeiro, show a strong correlation between low nominal interest rates set by the government and consumption-based growth, as Brazilians could pay for goods and services using cheap credit[15].

The increase in household consumption led to formal sector growth and caused real disposable income to grow: in effect, a virtuous cycle[16]. Nominal interest rate and private consumption activity had a strong correlation with economic growth between 2004 and 2010.[17]

In 2011, the government “adopted some measures to control consumer credit” because inflation was rising.[18] This policy change resulted in a significant decrease in growth of private consumption until mid-2012. [19]

To counteract the drop in consumption growth, the Central Bank decreased the nominal interest rate. This policy was enacted in late 2011 and Brazil saw an increase in private consumption levels until 2013.[20]

So while easy access to credit can be strongly linked to growing consumption, this type of credit-based growth is unsustainable, because high levels of debt eventually restrain additional household purchases.

On a macro-level, this is a model of consumption-based growth that depends on households that were previously unable to access to credit to take on debt.[21] The problem with Brazil’s credit-based consumption is its dependence on households that were previously unable to take on debt.

Such a growth strategy can only work for so long before a “bubble” forms. The Rousseff Administration took action against the growing credit bubble and attempted to reduce inflation by increasing nominal interest rates and reducing access to credit.

The drop in consumption is due to the fact that households either did not have access to credit to make purchases or the increase in interest rates would absorb extra funds and may even have led to defaults on payments. [22]

A reduction in credit-based consumption in turn led to a drop in aggregate demand in Brazil and started a cycle in which jobs were cut due to lack of demand. Less consumption and fewer tax-paying workers decreased government revenue, which increased the deficit as the government maintained expenditure levels. The concurrent changes in interest rates and credit-based consumption illustrate the importance of credit to recent changes in the Brazilian economy.

This article does not intend to leap to the defense of credit-induced consumption as a way out of the current economic recession, but wants to point out that the recognition of the roots of Brazil’s economic hardships is critical in finding an effective way to manage the economy.

The impressive period of growth, in part due to credit-based consumption from 2003 to 2011 helped to pull 40 million Brazilians out of poverty and into a group called “Class C,” an economic grouping with households that earn an income between 1,200 and 5,174 Brazilian reais per month.[23]

As the Temer Administration attempts to stabilize the economy it must remember that a significant portion of this poverty reduction regimen was due to a consumption boom that has largely faded. Adopting a policy that limits the government’s ability to supplement consumption in times of recession may put these households’ recent economic gains at risk.

PEC 241 does not address how to boost consumption in a sustainable manner, yet the spending cap will continue to limit government expenditures in a contracting economy and potentially constrain future changes to critical services.

For example, PEC 241 ignores the changing age demographics of Brazilian society by putting a cap on spending that will conflict with the need for increasing healthcare costs, requiring cuts to be made somewhere else in the budget or see a drop in the quality of care.

PEC 241’s cap on government expenditure would have to accommodate the growing elderly population in Brazil, which is currently a bit over 10 percent of the population.[24] By capping government expenditure, health spending is limited.

Brazil will not be able to address the growing population over the age of 60, which is expected to almost double from 2011 to 2031.[25] To give further context to this issue, both the youth age group (0-14) and the elderly age group are expected to equal 20 percent of the population in 2027 at which point the size of the elderly age group will exceed the size of the youth for the considerable future.[26]

During this transition, the workforce is likely to be reduced in size and be unable to support the aging population. In effect it appears that Temer’s PEC 241 is setting the government up for failure in addressing a major health budgeting issue in the long term.

Another troubling aspect of PEC 241 is that it removes much of the administration’s ability to respond to an evolving economy by capping government expenditure. Given the long-term effects of this amendment, Brazilian policy would be less responsive to major changes in the economy, such as rapid growth or crisis.

Creating a cap that cannot be easily adjusted within 20 years means that the Temer Administration is depending on the policy’s effectiveness and restricting the next presidents in their ability to change state policy despite variable economic conditions.

PEC 241 could also limit the constitutional balance of power between government branches, as the legislature loses its ability to have significant influence on budget decisions under a constitutionally mandated spending freeze.

In Temer’s pursuit of increased foreign investor confidence and attempt to control fiscal deficits, he is overlooking other key issues within Brazil’s domestic economy, which may prove to be costly, if not for him, then for the Brazilian state and people.


[1] Fagundez, Ingrid, Entenda o que está em jogo (e as polêmicas) com a PEC que limita o gasto público (BBC Brazil, Oct/10/2016) –

[2] Ibid.

[3] Ibid.

[4] Otoni, Luciana; Levin, Asher; Brazil’s Rouseff Announces More Education Spending Cuts (Reuters, Jul/30/2015)

[5] Paulo, Trevisani; Brazil’s Congress Approves Rouseff’s Veto of Spending Bill (The Wall Street Journal, Nov./18/2015)

Galvao, Arnaldo; Brazil’s Congress Upholds Majority of Rouseff’s Budget Vetoes (Bloomberg, Sep/23/2016)

[6] Galvao, Arnaldo; Colitt, Raymond; Rousseff Wins Breakthrough on Austerity as Brazil Caps Pensions, (Bloomberg, 5/27/2016)

[7] Fargundez

[8] Proposed Amendment to the Constitution, (Subchefia of Parliamentary Affairs, June 2016)

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Ibid.

[15] Serrano, Franklin. Summa, Ricardo. Aggregate Demand and the Slowdown of Brazillian Economic Growth from 2011-2014 (CEPR, August/2015) P.13

[16] ibid.

[17] Serrano and Summa P. 1

[18] Serrano and Summa P. 16

[19] Serrano and Summa P. 17 – 18

[20] Serrano and Summa P. 18

[21] Serano and Summa P. 16

[22] Serrano and Summa, P. 17

[23] Reid, P. 172

[24] ibid.

[25] Reid, P. 273

[26] Gragnolati, Michele; Jorgensen, Ole Hagen; Rocha, Romera; Fruttero, Anna. 2011. Growing old in an older Brazil: Implications of Population Aging on Growth, Poverty, Public Finance, and Service Delivery (World Bank,2011) P.59

Jordy Garcia is a research associate at the Council on Hemispheric Affairs –


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It seems the future never arrives in Brazil What Lies Ahead in Brazil? Brazil Has No Exemplary Past or Present. But What Lies Ahead for the Country? Europeans, US, developed country, developing country. Bolsonaro, future B. Michael Rubin For years, experts have debated what separates a developing country from a developed one. The GDP (Gross Domestic Product) of a country is one simple way to measure its economic development. Another way to measure a country's progress is the extent of public education, e.g. how many citizens complete high school. A country's health may be measured by the effectiveness of its healthcare system, for example, life expectancy and infant mortality. With these measurement tools, it's easier to gauge the difference between a country like Brazil and one like the U.S. What's not easy to gauge is how these two countries developed so differently when they were both "discovered" at the same time. In 1492 and 1500 respectively, the U.S. and Brazil fell under the spell of white Europeans for the first time. While the British and Portuguese had the same modus operandi, namely, to exploit their discoveries for whatever they had to offer, not to mention extinguishing the native Americans already living there if they got in the way, the end result turned out significantly different in the U.S. than in Brazil. There are several theories on how/why the U.S. developed at a faster pace than Brazil. The theories originate via contrasting perspectives – from psychology to economics to geography. One of the most popular theories suggests the divergence between the two countries is linked to politics, i.e. the U.S. established a democratic government in 1776, while Brazil's democracy it could be said began only in earnest in the 1980s. This theory states that the Portuguese monarchy, as well as the 19th and 20th century oligarchies that followed it, had no motivation to invest in industrial development or education of the masses. Rather, Brazil was prized for its cheap and plentiful labor to mine the rich soil of its vast land. There is another theory based on collective psychology that says the first U.S. colonizers from England were workaholic Puritans, who avoided dancing and music in place of work and religious devotion. They labored six days a week then spent all of Sunday in church. Meanwhile, the white settlers in Brazil were unambitious criminals who had been freed from prison in Portugal in exchange for settling in Brazil. The Marxist interpretation of why Brazil lags behind the U.S. was best summarized by Eduardo Galeano, the Uruguayan writer, in 1970. Galeano said five hundred years ago the U.S. had the good fortune of bad fortune. What he meant was the natural riches of Brazil – gold, silver, and diamonds – made it ripe for exploitation by western Europe. Whereas in the U.S., lacking such riches, the thirteen colonies were economically insignificant to the British. Instead, U.S. industrialization had official encouragement from England, resulting in early diversification of its exports and rapid development of manufacturing. II Leaving this debate to the historians, let us turn our focus to the future. According to global projections by several economic strategists, what lies ahead for Brazil, the U.S., and the rest of the world is startling. Projections forecast that based on GDP growth, in 2050 the world's largest economy will be China, not the U.S. In third place will be India, and in fourth – Brazil. With the ascendency of three-fourths of the BRIC countries over the next decades, it will be important to reevaluate the terms developed and developing. In thirty years, it may no longer be necessary to accept the label characterized by Nelson Rodrigues's famous phrase "complexo de vira-lata," for Brazil's national inferiority complex. For Brazilians, this future scenario presents glistening hope. A country with stronger economic power would mean the government has greater wealth to expend on infrastructure, crime control, education, healthcare, etc. What many Brazilians are not cognizant of are the pitfalls of economic prosperity. While Brazilians today may be envious of their wealthier northern neighbors, there are some aspects of a developed country's profile that are not worth envying. For example, the U.S. today far exceeds Brazil in the number of suicides, prescription drug overdoses, and mass shootings. GDP growth and economic projections depend on multiple variables, chief among them the global economic situation and worldwide political stability. A war in the Middle East, for example, can affect oil production and have global ramifications. Political stability within a country is also essential to its economic health. Elected presidents play a crucial role in a country's progress, especially as presidents may differ radically in their worldview. The political paths of the U.S. and Brazil are parallel today. In both countries, we've seen a left-wing regime (Obama/PT) followed by a far-right populist one (Trump/Bolsonaro), surprising many outside observers, and in the U.S. contradicting every political pollster, all of whom predicted a Trump loss to Hillary Clinton in 2016. In Brazil, although Bolsonaro was elected by a clear majority, his triumph has created a powerful emotional polarization in the country similar to what is happening in the U.S. Families, friends, and colleagues have split in a love/hate relationship toward the current presidents in the U.S. and Brazil, leaving broken friendships and family ties. 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