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Brazil just enacted the harshest austerity program in the world

The president is giving unprecedented shock therapy to the country’s failing economy.

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Americans worried that Donald Trump will try to shred the nation’s social welfare programs can take some grim comfort by looking south: No matter what Republicans do, it will pale in comparison with the changes that are about to ravage Brazil.

On Thursday, a new constitutional amendment goes into effect in Brazil that effectively freezes federal government spending for two decades. Since the spending cap can only increase by the rate of inflation in the previous year, that means that spending on government programs like education, health care, pensions, infrastructure, and defense will, in real terms, remain paused at 2016 levels until the year 2037.

The cap doesn’t increase if the economy grows, or to accommodate population growth, or to allow more funds to care for Brazil’s aging population. Paulo Zahluth Bastos, an economics professor at the University of Campinas, estimates that education spending per child will plunge by nearly a third and health expenditures per patient will decline almost 10 percent.

The measure, introduced by Brazilian President Michel Temer, includes a clause that says the earliest it can be revised is in 10 years. If the government wants to overturn the amendment, it will require the three-fifths majority in Congress that was needed to pass it, a tall hurdle that Brazil’s fractious party system is rarely able to surmount.

A number of analysts have compared the Brazilian amendment with other harsh austerity measures around the world — many of which were implemented by governments after the financial crisis in 2008 — and found that it appears to be without rival in terms of its severity.

Laura Carvalho, an economics professor at the University of São Paulo, told me that while some countries do implement rules for limiting a growth in spending over time, none of them detach spending from growth in GDP entirely. That is, austerity plans don’t usually keep spending on things like hospitals frozen even when the economy starts growing again and generating more government revenue.

She said it’s also exceptional to see something like a constitutional amendment set to last 20 years — typically an injection of austerity is implemented through fiscal targets or laws passed by legislative bodies and designed to last a few years as a country weathers an economic storm. That’s an assessment that echoes the remarks of a senior United Nations official who warned Brazil that the amendment places the country in “a socially retrogressive category all of its own” and stands at odds with its human rights obligations.

As Carvalho puts it: “It used to be football. But Brazil is now a world champion in austerity.”

Brazil is in free fall

When Temer became acting president of Brazil in May, he inherited the worst recession the country has seen in more than a century. Since beginning his turbulent time in office, he’s only seen the economy wither further by the day. Now he’s administering shock therapy.

Brazil is in a state of total institutional chaos at the moment. Its hard-hitting recession, which began in 2014, has coincided with — and in part been driven by — political crises that have brought Brazilians’ faith in the country’s political leadership to historic lows.

The country’s previous president, Dilma Rousseff, was impeached in August for allegedly doing some creative accounting in the budget to disguise the size of the deficit in previous years. But her impeachment was a highly politicized operation, and support for her removal from office was driven in large part by a colossal bribery scandal that funneled funds from the Brazilian state-owned oil giant Petrobras to the three left-leaning parties that formed the government’s ruling coalition.

The new center-right president, Temer, is now struggling with his own corruption scandals while trying to jump-start the economy. Arresting politicians is an everyday occurrence in Brazil at the moment.

So the spending cap that Temer pushed for is a bid for, among other things, demonstrating discipline that appears to be totally absent in Brazil’s government. The rationale is that an excess of government intervention and spending is to blame for much of the budget deficit and the economy’s weakness. Austerity advocates say this measure is meant to freeze that spending in a bid to reestablish responsible government and restore business and investor confidence.

In the runup to the amendment, Temer’s government placed advertisements in national newspapers that read: “Let’s pull Brazil out of the red and start growing again” (red being a pun because it plays off the color of Rousseff’s party).

As far as inspiring faith from investors, the amendment appears to be working. Brazil’s currency and stocks rose during December in part because of the passage of the measure.

Brazil is placing the burden of the crisis on the poor

Demonstrators clash with police during a protest in Brasilia over the spending cap.
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The issue with the spending cap is that it places the burden of reining in government spending entirely on beneficiaries of government spending — all Brazilians, but especially the poor and the vulnerable.

Many in Brazil are furious over the spending cap. Fierce protests have been emerging in cities across the country, and violent clashes with the police are commonplace. According to a poll published in the Folha de S.Paulo newspaper this week, 60 percent of Brazilians are against the cap. Criticism was strongest among low-income and young Brazilians; the rich tended to support it.

While the amendment does a great deal to limit the expenditure of government funds, it doesn’t do anything to directly address how to generate them directly: taxes.

“The major cause of our fiscal crisis is falling revenues,” Carvalho says, noting that the populist Rousseff, known for her support for government programs, cut taxes for the corporate sector during her time in office over the past few years in an attempt to avoid losing public support.

Carvalho says taking an ax to spending is coming at the expense of discussing “taxing the very rich, who do not pay very much in taxes, or eliminating tax cuts that have been given to big corporations.”

Brazil’s tax code is extraordinarily generous to corporations and the wealthy, and helps buttress its status as one of the world’s most unequal countries. Brazil’s highest income tax rate is just 27.5 percent — for comparison, US tax rates go up to about 40 percent, and in Scandinavia they can exceed 60 percent.

But Brazil’s tax code is especially regressive because of loopholes like the 1995 personal tax exemption that allows people to be shielded from income taxes if they own a company under certain profit investment conditions. Much of Brazil’s elite set up companies for themselves and channel the money they make via their livelihood through them. The result is that most of the income of the very rich in Brazil is not subject to personal income tax.

Carvalho estimates that if you closed tax breaks for corporations and the personal tax emption that the rich exploit, “that would cut the fiscal deficit projected for next year by half.”

It won't be companies and the well-off that feel the pain, however. As is so often the case, it will be the poor.