(Bloomberg) -- In a rare moment of political consensus, President Jair Bolsonaro and state governors publicly endorsed an economy ministry’s proposal to freeze public servants salaries until the end of 2021 as part of a financial aid package during the pandemic.
The agreement was reached during a virtual meeting with all 27 governors on Thursday, plus the heads of both houses of congress and Economy Minister Paulo Guedes.
“This meeting is aimed at joining efforts to mitigate the crisis,” Bolsonaro said at the beginning of the discussion, asking for consensus. He added that veto is “the least bitter medicine” for public servants, and that it would be of extreme importance for the rest of the population.
He was praised by Sao Paulo Governor Joao Doria, with whom he has repeatedly sparred over quarantine measures. “Let’s go in peace, president, let’s go together. It’s the best way to beat the pandemic,” Doria said.
Investors are closely monitoring the issue as a measure of how much power Guedes retains in the administration. Tired of losing budget battles in congress, the fiscally-conservative minister had expressed concern that, without Bolsonaro’s support, public spending would soon soar to unsustainable levels, according to people close to his thinking.
Read More: Brazil Economy Czar’s Frustration Grows Over Lost Budget Battles
The agreement helped lift local assets as it eased investors’ fears of fiscal deterioration. Stocks rose, swap rates fell and the real -- the world’s worst performing currency this year -- led gains among emerging-market peers, also boosted by the central bank’s vow to step up intervention if needed.
Critical Deal
The freeze of public worker wages was the only condition the economy ministry placed on a 125 billion-real ($22.5 billion) financial aid package for states and municipalities. Congress approved the bill, but with Bolsonaro’s blessing excluded several job categories from the freeze, such as police forces, teachers, and social workers.
Those exclusions frustrated Guedes’ belt-tightening efforts, but were supported by cabinet members who want more public spending in order to garner political support from Brazil’s numerous public servants. The bill was approved by Congress two weeks ago, but Bolsonaro’s delay in signint it into law it enabled some states to rush to approve salary increases up to 25% for civil servants.
Guedes asked Bolsonaro to veto the exclusions. “We are only asking for two years without a raise,” he told journalists. “Public servants have job stability and salaries higher than the public sector.”
He said that leaving out those occupations from the freeze would end up costing the government 120 billion reais, an amount too difficult to swallow as a post-pandemic economic crisis looms in Latin America’s biggest economy. The economy ministry is simultaneously debating extending a payment to informal workers during the crisis, which would add 45 billion reais to the ledger.
While lawmakers may still reject Bolsonaro’s veto, the agreement between Bolsonaro, governors and Senate President Davi Alcolumbre makes that less likely to happen. As head of congress, Alcolumbre may leave the presidential veto out of lawmakers’ voting agenda, reducing risks that it’s overturned.
©2020 Bloomberg L.P.
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