Brazil needs to overhaul its fiscal rules and increase public spending to boost growth, said a senior economic adviser to the left-wing Workers’ Party, which is most likely to return to power in this year’s elections.

Unicamp economics professor Guilherme Mello said Brazil’s triple fiscal law — long considered a stabilizing pillar for many in financial markets — is outdated at best and “at worst” out of this world.”

“We have to review the rules. The best thing we can do is sit down and say: ‘Let’s be serious. We need a new set of fiscal rules, it can be one rule, two rules, a set that respects good fiscal rules The new rules of principle,” Mello said.European leaders such as France’s Emmanuel Macron and Italy’s Mario Draghi also called for new approach He pointed to fiscal policy.

The Workers’ Party, known by its Portuguese initials PT, is led by former union member Luiz Inácio Lula da Silva, who served two terms as Brazil’s president between 2003 and 2010. His favorite is the October election.

“[The new set of rules] It must be flexible, it must be countercyclical, it must contribute to long-term debt stabilization, it must contribute to state planned spending. Let’s make fiscal rules that match the world’s experience,” said Mello, who coordinates the economic policy team at PT’s official think tank.

Brazilian government spending is governed by three rules: the Fiscal Responsibility Act, which sets budget transparency rules; the Golden Rule, which prohibits the government from borrowing to pay for recurring expenditures; and the spending cap, which limits budget increases to inflation for 20 years.

Of the three, the spending cap – known locally as roof – is the most divisive. For investors, it’s the fiscal backbone to prevent runaway spending in emerging economies, whose combined debt reached nearly 90% of GDP in 2020.

But Mello said the spending cap “is not only outdated, it’s out of this world. No country in the world has it. No economist sees this and says it’s a good idea to freeze spending for 20 years.”

He added, roof Given that it has been circumvented many times under the Bolsonaro government, it has lost credibility.

Under Lula’s leadership, the PT’s tenure in government has been marked by increased spending on social assistance programmes, such as the Bolsa Familia cash transfer scheme, and major infrastructure projects, particularly in transport, energy and water. Much of that money came from record taxes, thanks to the commodity boom.

However, the direction of policymaking changed after Lula’s successor, Dilma Rousseff, endured a deep, years-long recession, with a subsequent right-wing government opting for fiscal Investment attracts Latin America’s largest economy.

Mello called the approach a “huge failure”, noting that economic growth has largely stagnated since then and that there is now “more poverty, more misery, more inflation and more hunger. “.

“The direction from 2016 to 2021 is to shrink the country and expect the private sector to do everything. This strategy cannot continue,” he said.

“Brazil is not [bankrupt]. Public expenditure. . . is important for creating conditions for growth, reducing inequality, and creating infrastructure. When you do that, it’s an investment that helps increase GDP and reduce debt in the long run. “

Such remarks are likely to cause panic among investors, who have largely praised Bolsonaro’s government’s more restrained approach to spending. But Mello believes spending is an effective tool when used properly.

“Brazil can spend more money if it spends right. You have to choose public programs that have certain characteristics. They have to have a high fiscal multiplier in the sense of generating more income and jobs; they have to generate social impact and must create the conditions for the future,” he said, adding that investments in energy infrastructure, for example, will reduce electricity costs and support the wider economy.

Sergio Vale, chief economist at MB Associados, said it was “inevitable” that the PT would attack Brazil’s fiscal rules if it returned to power, given changing global attitudes towards spending.

“The problem is that the fiscal position today is worse than the one Lula inherited in 2003. We will end the year with a debt of 84% of GDP, a primary deficit of over 1% of GDP, and very high interest rates. . If there is no room, the government It’s no use trying to spend money,” Vale said.

He added that it would be fine if spending caps were replaced with better rules, but that was unlikely to happen.

“Their idea appears to be to lift the rules and increase public and social investment, but without a strong adjustment to the rest of spending, that would mean a bigger deficit and a worse situation.”

For Mello, the clearest validation of his approach came in the first year of the pandemic, when the Bolsonaro government rolled out a stimulus worth 8% of GDP, which included monthly payments. 600 reais ($130) in cash for nine months to millions of Brazil’s poorest people. The plan is believed to reduce the economic contraction in 2020 to minus 4%, much better than the original forecast of minus 9% or 10%.

“We proved in 2020 that social transfers work. They work for GDP, they work for poverty and hunger.”

Additional reporting by Carolina Ingizza