Guedes stays as long as spending cap prevails
Despite being caught in the crossfire, Economy Minister Paulo Guedes does not intend to step down. Yet, he has already told his top aides how far he can go. Mr. Guedes will not stay in office if, by chance, there is a decision to going over the spending cap.According to the law, the annual budget cannot force a real increase in spending. Any increase must be adjusted only by inflation according to the IPCA (Extended Consumer Price Index) measured over the 12 months to June.The minister understands that going over the spending cap will be a blight for the economy and for the country, which will translate into more inflation. Inflation is a very expensive way for the population to resolve distributive conflict. After increasing 1.16% in September, the biggest change for a month of September since 1994, the year the Real Plan was created, the IPCA has measured double-digit inflation in a 12-month period: 10.25%.The strategy that Mr. Guedes intends to follow continues to be the approval of the Income Tax overhaul and of a solution for the payment of court-ordered debts known as "precatórios." Only then he will have the objective conditions for the creation of Auxílio Brasil, a substitute for cash-transfer program Bolsa Família, which would start with R$300 monthly payments this year. This is a delicate mission, as the Senate does not want to pass the Income Tax overhaul in a hurry.It would be up to the federal government to convince the senators that this is the white flag that should be raised. And the Senate could not, given the urgency of the matter, change the bill approved by the Chamber, which, by the way, is quite bad.The federal government’s expectation is that inflation will start to slow down and, for that to happen, it is necessary to assert control of public spending as a contribution to the monetary policy. Otherwise, prices will tend to rise further, requiring a greater dose of monetary tightening.Today it is a cost inflation. There is an increase in prices with a reduction in the level of activity that drags on without establishing itself. The classic picture of cost inflation is to raise prices and reduce quantities produced. And there is hope that, in the absence of demand, the inflationary process will be exhausted.Amid all this, Mr. Guedes and Central Bank President Roberto Campos Neto face accusation that they both have offshore companies in which they keep a portion of their assets protected from exchange devaluation. The...
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