How can politics complicate fiscal policy




















During the political turmoil of that period fiscal and monetary control was lost, as economic policy became totally subordinated to political struggles. For a first hand view of the events in this period by the U. Once confirmed in power, Goulart proved to be weak president. He made half-hearted attempts at stabilization, which were soon abandoned when he could not resist the demand of labor leaders for rapid wage adjustments.

Pressures from other directions came from the demands of the business community to refrain from painful credit restrictions, as well as from other quarters not to abandon inflationary subsidized exchange rates for the import of petroleum and wheat, and not to readjust public utility rates. Budget deficits increased and the rate of inflation grew to 50 percent and finally in to yearly rates of close to percent.

A combination of economic and political turmoil finally resulted in a military coup on March 31, The military governments that took charge in would last until The first three administrations were relatively immune from populist pressures, while the last two were more sensitive to the impact of their economic policies on the public.

With the passage of power to the succeeding military government of General Artur da Costa e Silva in , most of these stabilization measures were maintained. Among them were the curtailment of government expenditures, increases in revenues through improved tax collection mechanisms, and real wage repression. The fact that this was a military government, which could overcome the opposition of various types of interest groups to its policies and that it was backed by U.

Also helpful was a new constitution which was drawn up in and approved in This new constitution strengthened the federal government's control over public expenditures. See Skidmore , p. As a result of these policies real government revenues rose by 25 percent in , while real wages declined.

Credit tightening was so strong that total real credit available in the mid- and later sixties was below that of the earlier part of the decade. In addition, subsidies on the import of petroleum and wheat were eliminated, public utility rates were raised, and efforts were made to modernize financial markets. Policymakers were aware that despite the short-run pain that these measures created for a number of socio-economic groups, the ultimate result would be to increase savings, which policy makers assumed would flow into the most efficient sectors.

The impact of these policies was a significant decline in government expenditures as a proportion of GDP: government consumption fell from Tax revenues rose from 18 to Lara Resende in Abreu , p. Huge declines were also experienced by the Transportation ministry. Most of the policies of the first two military governments were carried out without any overt political resistance. This was only possible in one of the most repressive political environments in modern Brazilian history. Shortly after their rise to power, the military ministers effectively subordinated the Constitution to an emergency "Institutional Act", which granted extraordinary powers to the executive.

This act effectively stripped Congress of any real role in determining government expenditures. Stirrings of opposition among civilian politicians, as well as a developing division between the more moderate " castellista " military and their hard-line " linha dura " fellow officers led to a further hardening in , as the latter faction in the military predominated. It permitted an even greater degree of freedom to formulate economic policy without any opposition.

These bodies would convene again only when called by the president. In addition, the president could decree intervention in the states in the national interest, without regard for the constitutional restrictions on intervention; he could suspend political rights of any citizen for ten years and cancel election mandates without regard for constitutional limitations. President Costa e Silva used his new powers to revise tax policy.

A constitutional amendment, masterminded by Finance Minister Delfim Netto, reduced from 20 to 12 percent the constitutionally designated share of the federally collected taxes distributed to state and municipal governments. Medici, benefited from the groundwork had been laid to promote growth policies without returning to the previous high levels of inflation.

Monetary, credit and fiscal policies became more growth-oriented. Notable was an easing of credit for agriculture and consumer purchases. Credit for housing construction was made available.

There also gradually evolved an elaborate system of tax incentives to promote exports, investment in backward regions, and the development of capital markets. A recently developed system of indexing financial instruments made it possible for the government to finance budget deficits in a non-inflationary manner and thus to increase expenditures on infrastructure projects.

Wage policies were maintained to keep costs, and thus inflationary pressures, under control. This was possible due to the continued repressive nature of the military regime. Skidmore observes that " no interest group or social sector could hope to gain by bringing pressure in the public arena behind the scenes was obviously another matter. The technocrats were still at the helm and they had clear sailing.

The politics of the military government and the tensions between the " castellista" and " linha dura" factions are extensively discussed in Gaspari , The net result of the various stimuli offered, and of the groundwork of the early military governments, was a long period of high economic growth.

From until Brazil's GDP grew at an annual rate of The administration of General Ernesto Geisel, who took office at the beginning of , was a return to the more moderate " castellista " faction of the military, which had generally viewed the intervention as a necessary but temporary departure from democratic government.

As such, it was committed to a gradual political opening. The new government was also committed to an improvement of the highly skewed distribution of income. This had substantially diminished the pride of the regime in achieving a number of years of high economic growth. All this occurred during the dramatic oil price revolution engineered by OPEC, which quadrupled the price of oil. As Brazil at the time was still dependent on imports for 80 percent of its oil needs, it faced two options.

The oil price increase required either a substantial transfer of resources to the oil-exporting countries or a sharp fall in the rate of economic growth in net oil importers like Brazil. The latter option was not politically acceptable to the Geisel administration, which needed growth in order to promote equity and to win the support of the population in its planned gradual political opening.

The growth option was made feasible through borrowing from international banks, which had accumulated a large amount of "petrodollars" and were anxious to lend out their deposits to favored borrowers, among them emerging economies like Brazil. Geisel opted for debt-led growth. The Second National Development Plan was introduced in It called for a huge investment program focusing on import substitution of basic industrial goods steel, aluminum, copper, fertilizers and petrochemicals and capital goods, and the rapid expansion of the economic infrastructure hydro and nuclear power plants, alcohol production for the automobile fleet, transportation and communications.

Many of these investments were undertaken by state enterprises. As a result of these policies, state enterprise expenditures as a percent of GDP rose from 9. At the same time the government's attitude towards the pricing of goods and wage adjustments was increasingly permissive, which contributed to a rise of inflation through out the s and s.

But strong resistance to restrictive policies from various sectors and the fact that slowing growth was perceived to make the political opening more difficult, soon led to a policy reversal. Throughout the first half of the s various attempts were made to control inflation such as the elimination of tax incentives, increases in public utility tariffs, limits to credit expansion, etc. None of these measures were followed through due to political pressures from many sectors, which were heightened by the announced goal of returning power to a civilian government.

He introduced the heterodox Cruzado Program in a drastic attempt to kill the country's hyperinflation. The program consisted of the introduction of a new currency and a price freeze.

At first, the virtually instantaneous disappearance of inflation dramatically increased Sarney's popularity. The effectiveness of the Cruzado Plan was gradually eroded as no measures were taken to make an underlying fiscal adjustment and as Sarney refused to make any corrective price adjustments.

The latter policy resulted in dramatic price distortions as the evasion of price controls rapidly spread throughout the economy. Both the lack of a fiscal adjustment and the refusal to loosen the price freeze were motivated by the political situation.

The congress scheduled to be elected in November was also to be a constitutional convention, while Sarney was anxious to have his term extended by an additional year. He thus was opposed to any adjustment in frozen prices, which he perceived as having been crucial in his past popularity, and he was also opposed to the fiscal measures necessary to consolidate price stability over the longer run.

Once Sarney had achieved his political goals in the November election, the Cruzado stabilization program was abandoned and Brazil was again subjected to hyperinflation. None of the subsequent attempts at stabilization, including a number of price freezes, succeeded. The political cost of fiscal adjustment was unacceptable to Sarney in the post-Cruzado period, as it also was to his successors, Presidents Fernando Collor and Itamar Franco.

A complicating situation in the late s and in the s was the new Constitution. One of its sections called for the automatic transfer of a substantial portion of federal tax receipts to the states and municipalities, without at the same time transferring some government expenditure obligations. This made the budget balancing task even more difficult than before. Brazil's Real stabilization program was introduced in July Developed by economists and policy makers under the leadership of Finance Minister Fernando Henrique Cardoso, who was subsequently elected President in late , it dramatically halted the hyperinflation.

Inflation fell from about 50 percent a month in June of that year to 0. The introduction of the new currency was preceded during several months by the use of an accounting pseudo-currency and by a temporary fiscal adjustment. The latter consisted of a number of temporary tax increases and some modest spending cuts. Even though price stability was maintained in part through a more open economy with a fixed exchange rate anchor , permanent fiscal adjustment was not achieved.

In fact, the fiscal situation of the government deteriorated from on. The operational budget balance, which includes the impact of real interest repayments on the debt, moved from a surplus of 0. The primary balance also deteriorated, moving from a surplus of 4. The main reason for the deterioration of the primary balance was the failure of the government to limit the rise in expenditures at every level of government.

As a result, the number of public employees remained stubbornly high and their real wages continued to climb. Also, the failure to rapidly implement reform of the civil service pension system meant that pension costs rose rapidly as a proportion of total public sector personnel costs. The financing of expanding public sector deficits was made possible by the maintenance of very high interest rates to secure voluntary private lending to the government.

With the fall in both actual and expected inflation, the real interest rate increased sharply. The situation was aggravated both internally, with the continuing failure to pass basic fiscal reforms, and externally, with the Asian financial crises in and the Russian crisis in As a result, the operational deficit, which is the basic primary deficit plus the real costs of servicing the public debt, rose from 3. The government thus found itself in a vicious circle. To maintain the exchange rate and to finance its deficit it had to borrow at a rising real interest rate, which in turn worsened the fiscal situation.

As this potentially unsustainable situation became more apparent to potential lenders, investor confidence was further undermined, putting additional pressure on real interest rates.

The result was that the sum of payments for interest and amortization rose from Without an offsetting rise in the primary surplus, the operational deficit of the government rose, adding to the stock of public debt. The success of the Plano Real gave the government enough credibility to facilitate the non-central bank financing of the deficit for a considerable amount of time. Thus fiscal adjustment could be postponed for a long time.

As the debt of the government mounted and fiscal adjustment was constantly postponed, however, the credibility of the government gradually eroded.

The international financial crises of accelerated the endgame of the plan and led to the devaluation of January Despite the increasing macroeconomic pressures arising both internally and externally, the success of the Real Plan in its first several years gave Cardoso an easy victory in his quest for a second presidential term in the October election. With the election behind them, policymakers had the political space to make greater fiscal adjustments than in the past.

This became even more urgent with the impact of the devaluation of January on public finances. As much of the federal debt was linked to the exchange rate, the public sector primary surplus had to be raised from 0. In the period interest rates had to be kept high to help finance the current account deficit, and to prevent an accelerated outflow of capital. This trend in interest rates, plus the accelerated devaluation in , increased the burden of the debt further.

By the end of the debt reached almost 60 percent of GDP, and necessitated an even higher primary surplus, which reached 3. Over the period, nominal expenditure growth reported by the National Treasury grew at about 3. The initial success of the Plano Real in ending high inflation was considerably more distant from the electorate, however, and polls even in early showed that the task of electing the government's candidate would be difficult.

As it became apparent to international financial markets that Lula had a good prospect of election to the presidency, the value of the real declined significantly, moving from about 2. This reaction of financial markets was largely motivated by the position of Lula in earlier tries for the presidency, when he questioned the necessity of repayment of the public debt.

He and most of his moderate supporters in the PT took pains to change this image during the campaign, and he was elected in the second round with about 60 percent of the vote, the largest in Brazilian political history. The central proposition of this paper is that much of the variation in Brazilian macroeconomic policy over the past half-century reflects the changing political pressures on the government.

Over much of the period, these pressures in the short run centered on output growth and the maintenance of employment, even at the longer run risk of fiscal disequilibrium arising from the financing costs of the public sector's deficit.

These pressures were clearly greater at times when the government believed it needed to broaden its political support or acquire greater legitimacy, and waned during periods of authoritarian government or after clear electoral successes. Although it is easy with hindsight to criticize what may appear to be a myopic focus on the short run, this " imediatismo ", as some Brazilians have characterized it, may have had a political, if not economic, justification.

It is of course far easier to state this proposition than it is to evaluate it in a more analytical or quantitative way. If the apparent association between political pressure and fiscal policy did in fact underlie much of Brazil's recent economic history, however, this relation should be visible over the long period of our study.

In this section we present the results of a formal test that suggests that there was indeed a highly significant association between political pressure and macroeconomic policy over this period. The 58 years from through do not provide obvious continuous measures of either political pressure or the macroeconomic stance of successive governments.

They do, however, permit the rough classification of the period into categories that reflect these two variables. This is the approach taken here, in which we employ a rules-based classification procedure to characterize each year in two different ways: 1 by the degree to which the political pressures on the government can were low, moderate, or high; and 2 by the expansionary fiscal stance of the government, similarly classified as low, moderate, or high. A formal rules-based classification was employed in order to avoid subjectivity in the assignment of levels for the political and fiscal variables in a given year.

In brief, this procedure used a number of criteria defined ex ante to classify a year as "high", "moderate", or "low" with respect to the two variables. A rules-based procedure was implemented in a parallel way for the fiscal variable. A public sector borrowing requirement PSBR in excess of 3 percent of GDP, for example, was sufficient to classify a year as one of "high" expansionary fiscal policy.

In earlier years, for which PSBR data do not exist, the classification rules employed measures of the federal deficit as a percent of GDP. A full explanation of the way in which the rules-based procedure was used for both variables over the 58 year period is provided in the Appendix. One obvious consequence of the rules-based classification procedure when applied to nearly six decades of annual data is that the link between political and fiscal pressures in Brazil may have changed.

Our procedure formally tests for this possibility by including a trend variable in the tests whose results we report below. Another serious potential difficulty with a time series-based analysis like that of this study is that of serial correlation.

This arises from the fact that periods of high or low political and fiscal pressure are likely to continue over more than one year, so that the 58 annual observations are not temporally independent, potentially compromising significance tests. Our procedure used a robust regression technique to deal with this potential problem. Finally, it might be argued that a simple three level classification of the variables into "high", "moderate" and "low" categories is too crude.

For this reason, we provide below the results of our test using a finer classification. Table 1 presents the results of the political and fiscal pressure classifications for the period from through As an illustration of how the classifications were made, we focus on three different, widely separated years.

In the Vargas government faced increasing political pressures, as the criticism by political opponents that subsequently ended with his suicide in August of that year steadily mounted. These pressures were exacerbated by a sharp fall in export earnings and a near doubling of the rate of inflation.

Compared to other years of this decade, or even with the whole period, our criteria rank the degree of political pressure as "high".

Fiscal policy, however, was not clearly expansionary, with the federal government budget at about half a percent of GDP, slightly lower than in several other years of the Vargas government, and well below that of the later Kubitschek government. In the absence of the more informative measures of fiscal policy available in later periods, we rank the fiscal variable as "moderate" in Two decades later, the new government headed by General Geisel, a proponent of the less repressive " castellista " branch of the military, took office.

Shortly afterward, the consequences of the sharp rise in the international price of petroleum forced a fall in GDP growth rate, which had averaged more than 11 percent in and , to a 5. Application of the rules-based procedure outlined above therefore ranks as a year of "high" political pressure, the first such year during the period of military rule that began in Fiscal policy, however, continued to be moderately contractionary.

The federal government budget deficit was a modest 0. Our classification rules accordingly rank as a year of "moderate" fiscal expansionary policy. Throughout his presidency and that of his two successors, Brazil's return to civilian, electoral-based rule significantly increased the political pressure on its leaders.

These pressures were increased by a sharp acceleration in the rate of inflation, the failure of the first of Brazil's stabilization programs in late As was shown earlier, the last years of this decade were among the worst in Brazil's long inflationary experience, with the annual rate exploding from about percent in to over percent in Our classification rules thus rank , as they do for all of the remaining years of the Sarney, Collor, and Franco governments, as one of "high" political pressure.

Fiscal policy in these years was marked by a virtual absence of control during the remaining years of the Sarney government until , resulting in a rule-based classification of "high" fiscal pressure for the period. In , the first full year of the new Collor government, there was an apparent tightening of fiscal policy.

This was rather artificial, however, since it was accomplished through the suspension of interest payments on public debt, delays in payments to government suppliers, and a once-and-for-all tax on financial assets. Despite the long-run inviability of this form of fiscal tightening, the resulting temporary fall in the PSBR translates to a "low" level of fiscal pressure, using our ranking procedure.

There exists a dip in that corresponds to the recession of Beginning February 26, an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of United States intelligence agencies that the global financial crisis presents a serious threat to international stability.

The bursting of the U. The financial crisis was triggered by a complex interplay of government policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.

Several causes of the financial crisis have been proposed, with varying weights assigned by experts. The U. Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. Research into the causes of the financial crisis has also focused on the role of interest rate spreads.

In March , Business Week stated that global political instability is rising fast due to the global financial crisis and is creating new challenges that needed to be addressed. Prompted by the financial crisis in Latvia, the opposition and trade unions there organized a rally against the cabinet of premier Ivars Godmanis.

The rally gathered some thousand people. In the evening the rally turned into a Riot. In late February many Greeks took part in a massive general strike to protest the economic situation and they shut down schools, airports, and many other services in Greece. Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment increased.

Beyond these initial protests, the protest movement has grown and continued in In late , the Occupy Wall Street protest took place in the United States, spawning several offshoots that came to be known as the Occupy movement. In the economic difficulties in Spain have caused support for secession movements to increase.

On September 11, a pro-independence march, which in the past had never drawn more than 50, people, pulled in a crowd estimated by city police at 1. The relationship between business and labor has been at the center of economic and political theory for the last two centuries.

The relationship between business and labor has been at the center of some of the major economic and political theories about capitalism over the last two centuries. In his work, Das Kapital, Karl Marx argued that business and labor were inherently at odds under capitalism, because the motivating force of capitalism is in the exploitation of labor, whose unpaid work is the ultimate source of profit and surplus value.

In order for this tension to be resolved, the workers had to take ownership over the means of the production, and, therefore, their own labor—a process that Marx explained in his other major work, The Communist Manifesto. The late nineteenth century saw many governments starting to address questions surrounding the relationship between business and labor, primarily through labor law or employment law.

Labor law is the body of laws, administrative rulings, and precedents which address the legal rights of, and restrictions on, working people and their organizations. As such, it mediates many aspects of the relationship between trade unions, employers, and employees.

Labor law arose due to the demand for workers to have better conditions, the right to organize, or, alternatively, the right to work without joining a labor union, and the simultaneous demands of employers to restrict the powers of the many organizations of workers and to keep labor costs low. The state of labor law at any one time is, therefore, both the product of, and a component of, struggles between different interests in society.

Encyclopedic both as a document of carpentry during that era and as a historic example of early color photography. Supersaturation was popular in the United States during that era; a fine example of the esthetics of its place and time. The Fair Labor Standards Act of set the maximum standard work week to 44 hours and in , this was reduced to 40 hours. A green card entitles legal immigrants to work just like U. Despite the hour standard maximum work week, some lines of work require more than 40 hours to complete the tasks of the job.

For example, if you prepare agricultural products for market, you can work over 72 hours a week, if you want to, but you cannot be required to work these many hours. If you harvest products you must get a period of 24 hours off after working up to 72 hours in a seven-day period.

There are exceptions to the hour break period for certain harvesting employees, such as those involved in harvesting grapes, tree fruits, and cotton. Professionals, clerical administrative assistants , technical, and mechanical employees cannot be terminated for refusing to work more than 72 hours in a work week.

These high-hour ceilings, combined with a competitive job market, often motivate American workers to work more hours than required. American workers consistently take fewer vacation days than their European counterparts and on average, take the fewest days off of any developed country.

Commercial law is the body of law that applies to the rights, relations, and conduct of persons and businesses engaged in commerce, merchandising, trade, and sales.

It is often considered to be a branch of civil law and deals with issues of both private law and public law. Privacy Policy. Skip to main content. Economic Policy. Search for:. Politics and Economic Policy. Fiscal Policy and Policy Making Fiscal policy is the use of government revenue collection taxation and expenditure spending to influence the economy.

Learning Objectives Identify the central elements of fiscal policy. Key Takeaways Key Points The two main instruments of fiscal policy are government taxation and expenditure. There are three main stances in fiscal policy: neutral, expansionary, and contractionary. Even with no changes in spending or tax laws at all, cyclic fluctuations of the economy cause cyclic fluctuations of tax revenues and of some types of government spending, which alters the deficit situation; these are not considered fiscal policy changes.

Key Terms taxation : The act of imposing taxes and the fact of being taxed expenditure : Act of expending or paying out. Deficit Spending, the Public Debt, and Policy Making Deficit spending and public debt are controversial issues within economic policy debates.

Learning Objectives Describe government debt and how it is formed. Key Takeaways Key Points Whereas, public debt refers to debt owed by a central government, deficit spending refers to spending done by a government in excess of tax receipts is known as deficit spending. As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers.

Deficit spending may, however, be consistent with public debt remaining stable as a proportion of GDP, depending on the level of GDP growth. The mainstream economics position is that deficit spending is desirable and necessary as part of counter-cyclical fiscal policy, but that there should not be a structural deficit.

The mainstream position is attacked from both sides — advocates of sound finance argue that deficit spending is always bad policy, while some Post-Keynesian economists, particularly Chartalists, argue that deficit spending is necessary, and not only for fiscal stimulus. Key Terms financing : A transaction that provides funds for a business.

Monetary Policy Monetary policy is the process by which a country controls the supply of money in order to promote economic growth and stability. Learning Objectives Recognize the importance of monetary policy for addressing common economic problems. Key Takeaways Key Points The official goals of monetary policy usually include relatively stable prices and low unemployment. Within almost all modern nations, special institutions exist that have the task of executing the monetary policy, often independently of the executive.

Key Terms contractionary : Tending to reduce the size of the money supply. Income Security Policy and Policy Making Income security policy is designed to provide a population with income at times when they are unable to care for themselves. Learning Objectives Define income security policy in the United States.

Key Takeaways Key Points Income maintenance is based on a combination of five main types of program: social insurance, means-tested benefits, non-contributory benefits, discretionary benefits, and universal or categorical benefits.

The fact that a compulsory government program, not the private market, provides unemployment insurance can be explained using the concepts of adverse selection and moral hazard. The Changing Federal Role in the Economy The role of the federal government in the economy has been a central debate among economists and political scientists for two centuries.

Learning Objectives Explain the role and the historical origins of the Federal Reserve System in the early 20th century. Key Takeaways Key Points In the United States, the Federal Reserve System also known as the Federal Reserve, and informally as the Fed serves as the central mechanism for understanding federal intervention and de-entanglement with the economy.

Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Key Terms monetary policy : The process by which the government, central bank, or monetary authority manages the supply of money or trading in foreign exchange markets.

Politics and the Great Recession of Global political instability is rising fast due to the global financial crisis and is creating new challenges that need to be managed. Learning Objectives Explain the causes and consequences of the Global Recession.

Key Takeaways Key Points Economic weakness could lead to political instability in many developing nations. Globally, mass protest movements have arisen in many countries as a response to the economic crisis. The repeal of the Glass—Steagall Act effectively removed the separation between investment banks and depository banks in the United States.

Most governments in Europe, including Greece, Spain, Italy, have faced austerity measures that include reduced government spending, elimination of social programs in education and health, and the deregulation of short-term and long-term capital markets.

Key Terms secession : Secession derived from the Latin term secessio is the act of withdrawing from an organization, union, or especially a political entity. Threats of secession also can be a strategy for achieving more limited goals. Business and Labor in the Economy The relationship between business and labor has been at the center of economic and political theory for the last two centuries. Learning Objectives Explain the relationship between labor and business in the economy.

Key Takeaways Key Points The late nineteenth century saw many governments starting to address questions surrounding the relationship between business and labor, primarily through labor law or employment law. The state of labor law at any one time is therefore both the product of, and a component of, struggles between different interests in society.

Key Terms labor union : A continuous association of wage earners for the purpose of maintaining or improving the conditions of their employment; a trade union. Licenses and Attributions. CC licensed content, Shared previously.



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