Brazil Pension Reform Plan, Slowing Growth Sparks Cabinet Tensions

Brazilian lawmakers and some cabinet members are expressing doubt over the proposed plans to raise the retirement age in the country, prompting the economy minister to threaten to resign.

Kristian Rouz — Brazilian Economy Minister Paulo Guedes is threatening to resign in case the proposed pension reform is softened and transformed into a smaller-scale overhaul. Cabinet tensions in Brasilia are also on the rise due to the recent cut to the nation's GDO growth forecast, and the mounting calls for impeachment of recently elected President Jair Bolsonaro.

READ MORE: Brazilian Economy Faces Threat of Recession Amid Political Tensions

In an interview with the Veja Magazine on Friday, Guedes said he would not tolerate cabinet's efforts to 'dilute' his plan to reform Brazil's social security system. The market-friendly minister believes the nation's spending on social welfare is holding back economic expansion and erodes fiscal sustainability.

Meanwhile, some cabinet members believe the proposed reform could exacerbate poverty, which is still widespread across Brazil's metropolitan and rural areas. But Guedes says at current levels of budget spending Brazil could face a fiscal crisis as soon as next year.

"I'll get on a plane and I'll live abroad. I'm old enough to retire," Guedes said. "If we do not reform, Brazil will catch fire. It will be chaos in the public sector."

Guedes, a US-educated economist and investment banker, is seen as a key member of Bolsonaro's government. He graduated from the University of Chicago, where he was taught by Milton Friedman, and is seen as a prominent advocate for neo-liberal economic policies — which include lower social spending and overall tighter fiscal policies.

Guedes insists lower taxes and lower social spending could help support economic growth, while preventing the budget from bleeding cash. His proposed pension reform would save some $307 bln over the next 10 years by hiking the retirement age and increasing pensions payments by working Brazilians.

However, his proposed pension reform is widely unpopular. Despite Guedes' close ties to President Bolsonaro, the latter still appeals to the majority of Brazilians, and has recently said he wouldn't oppose the minister's possible resignation.

"Nobody is obliged to stay as cabinet minister," Bolsonaro said. "Logically, he is seeing this as a catastrophe, and I agree with him, if we do not approve a reform that is similar to the bill we sent to Congress."

The president, however, appears to be seeking a compromise to the proposed reform, not least in order to maintain the support of his voters — many of whom come from poor and economically disadvantaged communities, and are heavily reliant on welfare payments.

Bolsonaro is also under pressure from centre-left members of Parliament and some cabinet members who don't believe the president is able to improve Brazil's economic performance going forward.

"I'm amazed by how weak Bolsonaro is politically. The government has everything going for it but sabotages itself with controversy and insults," Renato Nobile, CEO of wealth management firm Genial Advisory, and a Bolsonaro supporter, said.

The latest round of cabinet tensions come after the Brazilian government reduced its 2019 economic growth outlook to 1.6 per cent from 2.2 per cent. The cabinet also said inflation could accelerate to 4.1 per cent — up from an earlier forecast of 3.8 per cent — due to disruptions in international trade and a weaker national currency.

Additionally, Brazilian authorities expect the economy to have contracted in the first quarter of the year, although the official 1Q19 report is set to be released later this month.

READ MORE: Brazil Faces Mass Protests Against Education Spending Cuts

"Indicators of economic activity in the first quarter have not recovered as we had hoped, especially manufacturing and industry," the Brazilian Economy Ministry said in a recent report.

Guedes, however, said he is open to negotiations in Congress over his proposed reform package. An alternative plan could raise the retirement age less dramatically. Additionally, some policymakers say by increasing pension contributions by working Brazilians, the minister proposes a de-facto increase in taxes — which contradicts his neo-liberal views.

Meanwhile, the Economy Ministry has already begun cutting budget spending to prevent possible fiscal turmoil next year. While some members of Congress believe these measures are insufficient, officials say they could provide some support to the economy while talks over the pension reform are underway.

"We decided not to make any further budget freezes, but the spending caps on all ministries will remain in place," the ministry's special secretary, Waldery Rodrigues, said.

Some economists say broader plans to lower budget spending would affect Brazil's public-sector investment, which could further impair GDP growth prospects. Market expectations of Brazil's economic growth stand at 1.45 per cent for the entire 2019, slightly lower than the revised governmental figures.

Guedes says he will resign immediately if his pension plan fails in Congress. The reform bill was expected to pass this summer, but growing opposition among lawmakers might suggest tough negotiations up ahead.