The Economist UK - 10.08.2019

The EconomistAugust 10th 2019 35

1

T

he moquecain Espírito Santo, a state
of 4m people on the coast of south-east-
ern Brazil, is lighter than the fish stew in
Bahia, its neighbour to the north, explains
a tuxedoed waiter in the capital, Vitória.
Capixabas, as Espírito Santo residents are
called, like it that way. Their beaches are
smaller than those of Rio de Janeiro, to the
south; their colonial towns plainer than
those of Minas Gerais, to the west. Once
considered signs of inferiority, these now
seem like symbols of frugality. Other states
are so indebted they cannot pay salaries,
but Espírito Santo’s accounts are in order.
That is thanks largely to the last gover-
nor, Paulo Hartung, who ran the state from
2003 to 2010 and then again from 2015 to
last year. Mr Hartung stood in 2014 on an
austerity platform, arguing that “spending
is taking the elevator while revenue is tak-
ing the stairs”. On taking office he set about
shrinking spending by 14%. His work
means that Espírito Santo is now a model
for other Brazilian states to follow.
Brazil’s fiscal incontinence is legendary.
The number of civil servants grew by 60%
between 1995 and 2016, to 12m. Since pub-
lic-sector workers cannot be fired or have
their pay cut, they become a permanent ex-

pense once hired. Perks such as raises for

seniority can even extend to widows’ pen-

sions, producing the unique “post-mortem

promotion”. Nearly 80% of government

spending in Brazil goes on salaries and

pensions, compared with a global average

of 50-60%. “Instead of a state that serves

the public, you have a state that serves the

state,” says Samuel Pessôa of the Brazilian

Institute of Economics at Fundação Getú-

lio Vargas, a university.

These days the crisis is worst at the state

level. The 27 states’ combined pensions

shortfall alone is growing by 140bn reais

($35bn) a year, more than that of the federal

government. The deficit has doubled in the

past five years. Seven states already do not

have enough cash to pay salaries; 12 more

are close.

Under Dilma Rousseff, Brazil’s presi-

dent from 2011 to 2015, states like Rio de Ja-

neiro depended on treasury-guaranteed

loans from state banks to keep spending.

But Brazil’s new president, Jair Bolsonaro,

has promised to reduce the size of the state.

His treasury head, Mansueto Almeida, has

made debt relief conditional on efforts to

comply with a fiscal-responsibility law—

passed in 2000 but long ignored—that re-

stricts spending on personnel.

So how has Espírito Santo stayed in the

black? One thing that sets the state apart

was foresight about the depth of Brazil’s

worst-ever recession, which began in 2014.

Other governors believed the then presi-

dent Ms Rousseff, who promised a quick

recovery. “We underestimated the size of

the crisis,” admits Julio Bueno, the treasury

secretary in Rio de Janeiro at the time. Bra-

zil’s gdpfell by 3.8% in 2015 and by 3.6% in

2016. Rio ended up with a budget deficit of
      11bn reais. Espírito Santo finished both
      years with a surplus.
      Boldness is the second thing that sets
      Espírito Santo apart. “Fiscal adjustment is a
      cake recipe not a silver bullet,” says Mr Har-
      tung. It can easily go wrong. As well as cut-
      ting budgets, including for the judiciary
      and legislature, he had to stand up to the
      unions, announcing the salary freeze on

Espírito Santo

Spirited effort

VITÓRIA
One Brazilian state stands out as a model of efficiency

Espírito

Santo

ATLANTIC

OCEAN

Bahia

Rio de Janeiro

Minas

Gerais

Vitória

100 km

182.6

6.6

57.5

263.9

273

91

176

73

BRAZIL

Investment

per resident

2018, reais

Debt as %

of revenue

Q1 2019

Source: National

Treasury; Ministry

of Finance

00

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