Why this is important to Wisconsin businesses: Jair Bolsonaro and his minister of the economy, Paulo Guedes, have promised to slash the public debt and overhaul the pension and income tax systems.
With 55 percent of the valid votes, conservative candidate Jair Bolsonaro was elected Brazil’s 38th president. During his campaign, Bolsonaro positioned himself as the anti-establishment candidate. His popularity also pushed his little-known Social Liberal Party into being the House's second-ranking party, with 52 congressmen elected, behind only the Workers’ Party.
Bolsonaro’s “economic guru,” Paulo Guedes, who holds a Ph.D. from the University of Chicago, will head the Ministry of the Economy, a merger of three existing ministries: finance, planning and budget, and industry and foreign trade. That will make Guedes the most powerful member of any president’s economic team since the administration of former President Fernando Collor de Mello, who was the last to have a Ministry of the Economy.
Despite never having occupied high-profile positions in the public sector, Guedes was a key addition to Bolsonaro's campaign in order to get the support of market operators and investors. He was the brains behind Bolsonaro's proposals for the Brazilian economy. One of the founders of investment bank Pactual (currently BTG Pactual), as well as the Millennium Institute—a libertarian think tank—Guedes was also a macroeconomics professor at Brazil's leading think tank, Fundação Getulio Vargas, and a majority stakeholder at Ibmec (currently Insper Business School). He has promised to erase the public deficit over the first year of the new administration and achieve a surplus in 2020. His a radical plan of privatization of assets would allow the country to slash its public debt by 20 percent from the current net public debt of 3.5 trillion reais.
His main proposals for the economy, which he promises will create a more business-friendly environment, include:
- Creation of the Ministry of the Economy (combining the ministries of finance, planning and budget, and industry and foreign trade) to oversee all federal financial institutions
- An independent Central Bank that is aligned with the Ministry of Economy
- Budget negotiations start each year with a “zero base” rather than the prior year’s budget as a starting point
- Budget cuts on the federal payroll
- Keeping the current basis of the macroeconomic system: floating currency, inflation targets and primary surplus goals
- Prevent the union tax (an obligatory contribution from workers to their unions) from being reinstated
- Massive privatizations whose resources go toward payment of the public debt
Guedes, who defends a major overhaul of Brazil’s pension systems, also proposes an overhaul of the income tax system to establish a flat 20 percent income tax rate for all Brazilians, no matter their income, with an exemption for people earning less than 5,000 reais a year (Brazil’s current tax rates go up to 27.5 percent). Additionally, Guedes has proposed a reduction to corporate income tax rates and on the tax to the distribution of dividends, in line with international trends. This move has been demanded by Brazilian businesses, which have become less competitive on a global stage after similar reforms in the U.S., France, Spain and Argentina.
While markets love Guedes’ ideas, it remains unclear if he will be able to implement his proposals to the fullest. At the request of the leading business magazine in Brazil, Exame, the consulting firm MB Associados drew up two potential scenarios for the next couple of years. Under the optimistic one, Guedes’ neoliberal ideas are implemented, the country limits public spending, and GDP grows by approximately 3 and 3.75 percent in 2019 and 2020 respectively. In a more pessimistic view, the reforms are watered down and congressional support for the administration wanes, the GDP growth forecast remains at 2 percent for the next couple of years, which still would not be bad since the last eight years were the worst in Brazil’s history in terms of economic growth.
The market’s goodwill is not enough; other positive economic signs must be taken into consideration. With $379 billion in international reserves—more than 10 times as much as in 2002—a balanced trade deficit and inflation rates under control, the Central Bank has managed to keep the country’s benchmark interest rate at its lowest point in history.