(Bloomberg Opinion) -- So much for sequins and ostrich feathers and three-story floats. The attention-grabbing accessories for this year’s Brazilian carnival were balaclavas, side arms and a backhoe gone wild.
The premier parade ground was Ceara, a populous northeastern state where rebel police demanded budget-busting wage increases on pain of a walkout, even as tens of thousands of revelers hit the unguarded streets. Hometown lawmaker Senator Cid Gomes was having none of it and charged at the mutineers atop a backhoe, only to be shot twice by a masked protester. Gomes is in a hospital and reportedly in stable condition. Not so Brazil where, unlike the finite pre-Lenten merriment, the fiscal carnival is the fiesta that never ends.
Spending beyond one’s means and passing on the bill to everyone else is as Brazilian as samba. Thankfully, not all such demands end in violence. Yet the Ceara cops and their brethren in other states are in the vanguard of a long line of government paid grievants, whose demands roil the public peace and hold authorities to ransom.
Brazilian security forces, including military police, the investigative civil police and prison guards, staged 715 strikes from 1997 to 2017. Police in at least 10 other states are pressuring for bigger paychecks.
It’s no coincidence that the strikes flare up during the carnival break, when millions of merrymakers hit the streets and as many others flock to holiday getaways. The crowds are a magnet for crime and mayhem. Hence the opportunity cost for mayors and governors counting on toughing out a security strike and the temptation of caving to the rabble even if it means kiting a check.
Cops are just part of the problem. No less than 60% of Brazil’s 5,570 municipalities rely on revenue transfers from the federal government. The National Confederation of Municipalities found in a survey that 69 townships in a sample of 733 declared financial calamity in 2019, essentially admitting to municipal bankruptcy. Another 229 municipalities — nearly a third of the total surveyed — say they could join the rolls of the penurious this year.
State governments are equally bereft. About half (13) of Brazil’s 27 states earned a C rating on the Brazilian Treasury’s descending solvency scale from A to D, meaning they blew their legal spending limits. C-rated states and towns are ineligible for loans.
Brazil has passed several measures over the past decades to curb such wanton accounting, including the heralded 2000 Fiscal Responsibility Law. Governors and mayors are bound to spend no more than 60% of their revenues on personnel. The subsequent fiscal recovery plan in 2017 accredited governments in the red for bailouts and debt restructuring, but only if they committed to contain spending, cut the pension bill through reform and privatized publicly owned companies. Nonetheless, most of those efforts fell short.
Fueling the emergency is the ever burgeoning bureaucracy: The number of municipal civil servants rose nearly 53% between 2004 and 2018, according to the Brazilian Institute of Geography and Statistics. Personnel absorb 61% of state and local government revenues, often forcing governors and mayors to shortchange investments. No wonder Brazil’s subnational governments spend well above the average of their wealthier counterparts in the Organization for Economic Cooperation and Development.
Bottomless political appetites are only partly to blame. A far more daunting challenge is Brazil’s profligate constitution, written by idealists who pledged to pay down the country’s woeful social debt by locking in budget commitments to health, welfare, pensions and generous salaries. The resulting budgetary straitjacket left administrators with Hobson’s choice: Slash payroll and risk violating the constitution or keep bloating personnel costs, which hoover up 61% of state and local government revenues, and shortchange public investments. Bad management has aggravated the problem.
The biggest states are also some of the biggest offenders. Just six states with more than 40% of the national population and nearly two-thirds (62.8%) of gross domestic product owed R$630 billion (around $130 billion) by 2017, according to a recent study by the University of Toronto’s Global Economic Policy Lab. Because the federal government and state-owned banks held most of that debt, a default could rip through the economy, threatening national solvency.
The nation’s two biggest regional economies, Rio de Janeiro and Sao Paulo, are among the country’s greatest credit risks, with total indebtedness topping 200% of net revenues.
Pensions for security forces add disproportionately to the bill. At the national level, armed forces retirees represent 31% of federal employees, but nearly half of all federal government public sector pension spending. Subnational governments carry an even heavier burden, with 14 of 27 states spending more on retired police and firefighters than they do on those on active duty.
One of the most onerous cases is Minas Gerais, where Governor Romeu Zema agreed to a 41.7% pay raise for security forces rather than risk a crime spike during carnival. Crowd-surfing state lawmakers quickly extended the indulgence to other public employees. Yet Minas Gerais, Brazil’s third largest state economy, is deeply in debt and so bound by the federal bailout pact to forego salary increases.
Few politicians have worked to fatten Brazil’s thin blue line more than President Jair Bolsonaro. Before staking his presidential run on a promise of downsizing the bureaucracy alongside market-friendly economy minister Paulo Guedes, the former army captain and lawmaker had built his 28-year record in congress on lobbying for the men and women in uniform.
His acolytes strongly encouraged a 2017 police strike in Espirito Santo state; the homicide rate exploded as beat police folded their arms. Bolsonaro also convinced Guedes to exempt the armed forces from last year’s pension reform, opening the door to a far more generous plan later in the year. Each state will have to thrash out its own pension plan for police and firefighters, who have shown their valor at the picket lines.
The barracks rebellion in Espirito Santo led the Supreme Court to declare walkouts by security forces unconstitutional, so ending years of legal equivocation favoring rogue cops. Nonetheless, state and local governors facing crime spikes continue to look the other way when police strike or even indulge them by granting amnesties to sanctioned cops.
Last week, Brasilia dispatched regular army troops to Ceara to keep the peace. Tellingly, however, no one in Bolsonaro’s inner circle condemned the police revolt, although Bolsonaro quipped that Gomes didn’t have a license to operate a backhoe. Justice minister Sergio Moro declared on Monday that despite the spike in homicides since the strike, he saw no evidence of “absolute disorder” in the streets.
The joke may have been lost on the state of 9.1 million, as homicides surged during the police walkout. Government bean counters were also likely not amused. The National Treasury has no legal obligation to rescue profligate regional governments. Fiscal hawks also warn that bailing out slackers only encourages more slacking. The reality is more complicated. “Politically, it’s just not viable to allow a meltdown in states and municipalities, many of which are strapped with structural difficulties such as loss-making payrolls, pension obligations and social benefits, or calamities like the mine collapse in Minas Gerais” said Adriana Dupita, of Bloomberg Economics, referring to the 2019 dam breach which took more than 250 lives.
“With national government’s finances already distressed and the world economy weakening as China slows down, Brazil is in a difficult place,” Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, told me. “If deeply indebted states like Minas Gerais or others go bankrupt, that can actually provoke a domestic crisis. Brazil has seen that before. It’s still a ticking time bomb.”
Policy overhauls now in the pipeline — rewriting the regressive tax code, privatization and remaking state pensions — could offer relief to states and towns skirting insolvency. Fortunately, the customarily reactive Brazilian legislature has shown some reformist mettle. Yet these initiatives will languish without backing at the top. With Bolsonaro apparently more committed to dishing out partisan zeal than parsimony, the prospects for salutary reforms look uncertain.
In fairness, no one government laid this trap. The Brazilian left had its go last decade when creative accounting by the Workers Party helped trigger a record recession from which Latin America’s biggest economy is still reeling. Now comes a right-wing president who winks at fiscal folly when he doesn’t outright encourage it, from governor’s palaces to police headquarters. It may not be the sort of threat to democracy that’s kept Brazilians in a lather ever since Bolsonaro took charge in Brasilia. But it’s one the country can no longer afford to ignore.
To contact the editor responsible for this story: James Gibney at jgibney5@bloomberg.net
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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