Dramatic Veto Episode Shows Bolsonaro Has Problems in Senate

(Bloomberg) -- Brazil’s lower house maintained a freeze on public sector wages that had been unexpectedly voted down by the senate, concluding a dramatic episode that revealed cracks in President Jair Bolsonaro’s congressional base.

In a 316-165 vote late on Thursday, house representatives upheld a presidential veto on salary raises for civil servants during the pandemic, going against fellow senators who had voted to overturn it. The senate’s decision on Wednesday night sent shock waves through the local market, as investors worried the wage increases could amount to an additional 120 billion reais ($21.3 billion) in government spending.

The Brazilian real lost 0.7% in the beginning of Friday's session even after the veto was maintained.

Postponing such pay raises was a cornerstone of an agreement reached earlier this year that included billions of dollars in aid for states and municipalities amid the pandemic. While Bolsonaro secured enough support in the house to maintain his veto, the senate’s move underscored the challenges the government is facing in the upper chamber, where defeats are mounting ahead of crucial votes, including on a reform of the country’s tax system.

In recent weeks, the senate approved a proposal opposed by the government that limits the interest rate banks are allowed to charge their clients during the pandemic. It also passed draft legislation to rein in on fake news that will impact some of Bolsonaro’s most vocal supporters. Both measures stalled as they were sent to the house.

Potential upcoming votes in the senate include a bill to grant the central bank formal independence, a proposal to extinguish a large part of existing federal funds and a reform of public sector jobs. But the forecast for such proposals, which also include the privatization of state-controlled utility Eletrobras, is uncertain, as some lawmakers may be unwilling to displease public servants for the sake of austerity just three months before municipal elections.

Litany of Complaints

Many senators openly criticize what they perceive as Bolsonaro’s preferential treatment of lower house representatives, whom he’s been showering with government jobs and extra funds for pet projects in exchange for political support.

“The give and take is not the same in the senate,” Senator Alvaro Dias, who voted in favor of civil servant wage increases, said in an interview. He also accused the lower house of not reciprocating the senate’s good will toward bills approved by the house.

Pro-business Senator Plinio Valerio said he doesn’t see a coordinated effort against the government but pointed at what he called a poor handling of relations with the upper chamber. “The real problem is the lack of government negotiation in the senate,” he said. “Nobody came to talk to me about the veto, maybe because of social distancing.”

Major Olimpio, a right-wing senator who used to be a close ally of Bolsonaro before breaking rank, minimized the fiscal impact of potential wage increases for police and health and education workers. “It’s a farce. These government numbers don’t exist,” he said, calling the freeze unfair.

Guedes’ Future

Congress’s struggles are taking a toll on Economy Minister Paulo Guedes, a University of Chicago-trained economist dedicated to austerity who called the senate’s decision to allow wage increases for public servants a “crime against the country.”

Guedes is becoming increasingly isolated in his defense of fiscal responsibility. Several cabinet members have aligned themselves with lawmakers who want Bolsonaro to loosen the spending cap rule that investors see as the most important symbol of Brazil’s fiscal credibility.

Bolsonaro insists on his faith in Guedes, but the minister himself has said more than once that if congress blocks his reform agenda, he’ll have no option but to leave his post.

Marcio Coimbra, a political scientist who leads the think tank Interlegis, said Bolsonaro will have to decide whether he supports fiscal responsibility or populist economic policies as budget pressures mount ahead of elections.

“Bolsonaro was playing in both fields and the senators forced him to take a stand supporting Guedes -- for now.”

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