Tuesday, January 23, 2007

Lula’s Growth Acceleration Program

The Growth Acceleration Program (PAC) departs from the assumption that the public sector should be at the core of the growth process.

The program does not place enough emphasis on key obstacles to faster growth, namely the extremely high levels of both current spending and tax burden. In turn, it not certain the effect of the program to boost long-term growth.

Overall view
On one side it is the most comprehensive set of measures (though similar to the one proposed by the PSDB/FHC team) since 1998. It remains to be seen if the measures will take off or not. A major drawback of the package is the fact that the government is leading the whole program whereas it could make more use of the public-private partnership and deliver a larger role to the regulatory agencies (created during the privatization process).
In terms of financing, we believe that the PAC does not provide any new resources to increase the investment to GDP ratio, because the underlying measures are simply a reshuffling of resources, either through a reallocation within aggregate demand or the federal government budget. The private sector plays a minor role in the program, mainly because the ‘tax breaks’ is channeled to only a few sectors. Clearly, the whole private sector will hardly increase investment in PPP without a significant reform in the regulatory structure. Hence, the new resources funding the PAC will come from the decrease in the primary fiscal surplus by 0.5% of GDP a year to 3.75% from a current target of 4.25% of GDP. The increase in investment by the government would come under the label of PPIs, or ‘priority investment programs’. Effectively, these resources explain more than 50% of the announced to increase government investments. In turn, it seems that the government assumes that these resources would be spend more productively by the state rather than transferred to the private sector through lower taxes, lower debt, and lower interest rates.
In terms of fiscal policy, other than reducing the primary fiscal surplus target to 3.75% of GDP, the PAC formalized more increases in current spending. In particular, the PAC will allow the payroll to continue to increase by 1.5% a year in real terms (greater than the IPCA inflation rate); and by continuing to increase the minimum wage by inflation plus the average real GDP growth of the previous two years. Given that the PAC contains no concrete measures or reforms to reduce the social security deficit it is fair to say that the social security will continue to raise current spending and being a pressure to decrease primary fiscal surplus beyond what is projected in the PAC.

It should be clear that the government intends to decrease the primary surplus as a way to increase spending instead of implementing a broad tax reform that would benefit the whole private sector. Higher current spending and, at the very least, maintenance of the tax burden at the current level will not boost private investment.

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