The Class Character of Macroeconomic Policies in Brazil of the Real

Introduction

Over the last several decades an alleged distinction between politics and the economy has underpinned the neoliberal discourse that demanded a reduction of the state’s influence on the market. However, when neoliberalism is analyzed in both theory and practice, one notices that even the neoliberal capitalism is necessarily related to the state. Instead of reducing the state’s influence, neoliberalism has actually repositioned the state within a modified socioeconomic context.

Throughout the evolution of capitalism, the state has adopted new ways of performing its role in the process of capital accumulation. Thus, to assess the capitalistic character of the state, one should examine its specific interactions with capital, strategies and regimes of accumulation, state forms, and the balance of political forces (Jessop, 1990). The modern form of capitalism is marked by the financial expansion of the economy, which has translated into a shift in the focus of economic activity from production to finance (Bellamy Foster and Magdoff, 2009). If one recalls that the return on interest-bearing capital is ‘a consequence of a special legal contract’ (Marx, 1991 [1894]: 470), the state’s role appears to be even more integral in the financial variety of accumulation. The truth of this claim can be clearly seen in the case of property rights, which form the foundation for class relations as perpetuated in the financial realm.

One may make an important contribution to the understanding of the state’s role in social relations by clarifying the motivations behind its interventions in the economy. Specifically, this clarification requires the forms of intervention of the state apparatus to be differentiated. At the same time, the common notion about the state’s abstention from action, which is simply another form of action, must be avoided. For example, if government activities are unregulated, the state demands assurance of the freedom of private action in these activities. Indeed, the state’s role has not declined despite the global integration of markets (Jessop, 2010). Although the state has traditionally been responsible for the general conditions of capital accumulation (Offe, 1984; Wright, 1999), it has more recently acted as the last resort for solving economic problems. A recent example is the role of the government during the economic crisis that began in 2008 (Bellamy Foster and Magdoff, 2009; Harvey, 2010).

Given these assumptions, the objective of this study is to examine how some of the most important fiscal and monetary policies implemented in Brazil in the period following the Real Plan (1994) have interfered in class relations and to what extent they reveal the financial class character of the state. Therefore, it is necessary to study the policies’ roles in driving concrete social phenomena to demonstrate what the state does in the midst of social relations in the general context of financial accumulation. I start from the hypothesis that in the current stage of capitalist accumulation, the state takes on a capitalist role of a financial nature. This role is revealed in macroeconomic policies that are consolidated around the financial logic of accumulation.

In the next section, I conceptualize the capitalist state. In particular, I stress its financial logic, which has been hegemonic within the Brazilian state since the launching of the Real Plan. In the third and fourth sections, I discuss how the Brazilian government has followed this financial logic in some of its central fiscal policies. In particular, I focus on the release of federal tax revenue entitlements, the so-called ‘fiscal responsibility’ policy, and the goals for the primary and nominal fiscal results. In the section immediately preceding the conclusion, I try to identify financial logic within monetary policy. To identify this logic, I focus on the political priority given to inflation control through inflation targeting, which has been in place since the collapse of the Real Plan in early 1999.

Financial Class Hegemony in the Brazilian Capitalist State

Although classical Marxism may not provide a systematic and coherent theory of the state (Jessop, 1990), the Marxist tradition does offer many explanations for the relationship between capital and the state. Thus, for the purpose of this paper, I adopt the concept of the state ‘as a means of appropriating surplus-product – perhaps even as a means of intensifying production to increase surplus – and as a mode of distributing that surplus in one way or another’ (Wood, 1981: 83). Such a concept must be updated to keep up with the prominence acquired by finance in the neoliberal stage of capitalism. The term finance refers ‘to the upper fractions of capitalist classes and to financial institutions in any social arrangement in which these fractions of capitalist classes control financial institutions’ (Duménil and Lévy, 2011: 13). We face what Harvey (2010: 48) calls a ‘state-finance nexus’, which ‘describes a confluence of state and financial power … where the state management of capital creation and monetary flows becomes integral to … the circulation of capital’.

The main point that stands out in this approach is the state’s class character. This character is not always clear because of the universalism formally registered in its conception as a promoter of welfare (Offe, 1975). Nonetheless, this character is clearly noticed in the exercise of class power performed by the state, which mediates the social relations between the rulers and the ruled and connects them in an asymmetric relation of domination and exploitation (Therborn, 2008 [1978]). Thus, the class analysis developed here relates largely to class relations – unequally distributed power over productive resources – and underlying class struggles (Wright, 2006); it relates less to other important dimensions, such as class structure, class location, and similar parameters.

An empirical notion of class relations backed by the state can be observed in the neoliberal era, during which the state stood by the capitalists in their attacks on labor to recover the profitability levels depressed by the Keynesian consensus. As O’Connor (2010) notes, the new form of neoliberal competition within and across nations produces significant gains for capital at the expense of labor. This new competition depends fundamentally on capital mobility, which requires that the state to create and maintain the conditions to foster it. In sum, if the purpose of capital is to accumulate surplus value, the state is the political means by which this accumulation is enabled (Bonefeld, 2010).

This approach raises some key concepts that will appear throughout this study and that must be considered mutually dependent. State, class, and exploitation are all believed to comprise a totality that develops in the realm of the state budget. The budget synthesizes the policies induced by the class struggle. In terms of the class struggle, it is worth keeping in mind that ‘the volume and composition of government expenditures and the distribution of the tax burden … are structurally determined by social and economic conflicts between classes and groups’ (O’Connor, 2002: 2). Furthermore, ‘tax finance is (and always has been) a form of economic exploitation and thus a problem for class analysis’ (O’Connor, 2002: 203). ¹ Thus, in the fiscal ‘superstructure’, we can see classes struggling for the monies collected by the state, which are eventually distributed as interest to financial capitalists, subsidies to production capitalists, welfare benefits to workers, and so on.

The state’s role as the central articulator of economic relations is common to the various stages and processes of capitalism. Although the state performs this role for capital as a whole, its main policies are carried out under the hegemony of some particular fraction of the capitalist class. Evidence of this phenomenon can be found in the structure of the power distribution within the state, whose dominant apparatus ‘is generally that one which constitutes the seat of power of the hegemonic class or fraction’ (Poulantzas, 1973: 48). This is evident when examining the evolution of Brazilian capitalism. Until the 1930s, agriculture for export was the nation’s most important economic activity and, as such, was closely tied to state power. From that time until the early 1980s, during the pursuit of import substitution and industrialization, the industrial elites occupied positions of influence in the state planning process. After a hiatus that some commentators call a ‘crisis of hegemony’, the 1990s marked the beginning of a trend towards the hegemony of finance in the economy and, consequently, in the state.

The hallmark of this new phase of the Brazilian economy was the Real ² Plan, whose most prominent goal was monetary stabilization. Launched in 1994, the Real Plan’s main premise was that only a drastic reduction of inflation could create an attractive environment for foreign investment (Rocha, 2002). Nevertheless, monetary stabilization, fiscal balance, and financial and trade liberalization comprised a model that did not consider the social costs of the reforms (De La Barra, 2006; Li, 2004). This economic model, with its disregard for social costs, was commonly used throughout Latin America. The main results were increased profits for finance at the expense of profits in non-financial sectors, increased unemployment, rising public debt, increasing violence, and wider inequalities between the rich and the poor (Duménil and Levy, 2001; Therborn, 2007). In summary, Brazil played its part in building an ‘emerging financial regime … designed to facilitate global capital mobility in search of profits via cheap labor’ (Asimakopoulus, 2009: 179).

The neoliberal movement and its monetarist and fiscal imperatives established finance and financial logic as the main sources of influence in government decisions. In ideological terms, neoliberalism promotes the view that an institutional framework based on strong private property rights, free markets, and free trade is the only path for the advancement of human well-being. These ideas have led to state practices such as deregulation, privatization, reduction of social support, and absolute faith in the integrity and soundness of money (Harvey, 2005). All of these practices were consistent with the increasing preeminence of ‘monetarism’, which held that inflation resulted entirely from the state printing too much money to bolster the pace of economic growth (Frieden, 2006). In the case of Brazil’s neoliberalism, the monetarist imperative was reflected in the exclusive priority given to inflation control over the growth of output and employment (Mollo and Saad-Filho, 2006).

This priority had important effects on the disputes among the social classes, which were supported by state mediation. The class fractions with privileged access to information and influence over policy generally prevail if state institutions prevent the less-privileged factions from obtaining equal access (Bowles et al., 1990). Public indebtedness is one realm in which this state favoritism takes place. According to Morais and Saad-Filho (2003), this phenomenon is specific to Brazil; in this context, finance primarily influences the economy through the ownership of public debt bonds rather than through the funding of industry and commerce or through the stock market. However, this situation has become more widespread in recent times. Even Europe is under an unprecedented level of pressure from bondholders.

Modern financial capitalism is different from what was once observed by Hilferding (1981 [1910]), who noted that banks had leveraged the dependence of industry and commerce on bank capital to obtain a measure of control over those sectors. It is not banks alone that exert such control; the financial sector in general – of which banks are only a part – exercises this control through the stock and capital markets. Furthermore, control is not limited to the capitalist infrastructure; it extends over the state as well. An illustrative example is the situation in Latin America, where this influence was rooted in national debt that was owed directly to private banks. When the debt crisis hit the region in the early 1980s, the Brady Plan – an IMF- and US-backed securitization in which banks forgave part of the outstanding contractual debt to protect bigger banks from the damage associated with potential national defaults – pushed countries such as Brazil to pursue neoliberal reforms.

Although Brazil has paid off its Brady Plan-related bonds and IMF debts and has accumulated international reserves that more than offset the whole external public debt, the outstanding internal debt remains higher than it was during and before the Real Plan. The nation’s outstanding internal debt stood at an average of 18.9% of GDP during the 1994–8 period, and this average rose to 41.2% during the 1999–2011 period (see Figure 3). ³ These efforts to reduce the external debt have put even more pressure on Brazil’s budget. The repayments of the relatively cheap external debt have been funded by increasing the relatively more expensive domestic debt. Indeed, the average implicit interest rate of the external debt was 6.3% per annum during the 2001–11 period, whereas the average rate on the domestic debt was 15.1% (Banco Central do Brasil, 2012c). This discrepancy reveals an increase in transfer payments from the state to the financial sector.

In terms of class relations, all of these issues comprise a contradictory system through which the state satisfies its creditors at the expense of workers’ real income by increasing the tax burden necessary to service the public debt. In strict Marxian terms, such a burden is not actually a capitalist relation because ‘the abolition of … taxes makes no change whatever in the quantity of surplus-value extorted by the capitalist at first hand from the worker’ (Marx, 1990 [1890]: 658). However, if one goes beyond this realm of production’s ‘first hand’ to account for the realm of circulation as well, such a burden is a real possibility. Thus, it becomes apparent that the tax system can become a device through which value is transferred to those with access to the financial markets (Morais, Saad-Filho and Coelho, 1999). In sum, the ‘usurer’s capital has capital’s mode of exploitation without its mode of production’ (Marx, 1991 [1894]: 732).

The fact that money is in the hands of finance – in addition to industrial and merchant capitalists – means that this sector interferes in employment, income, and the means of dominating labor (Salama, 1998). Brazil’s high interest rates have led to huge financial profits at the expense of reduced profits in production, which depresses real wages and raises the rate of labor exploitation (De Oliveira, 2006). Additionally, this situation reveals a conflict within the ruling class. The most well-known conflict is the dispute regarding interest rate levels: industry and commerce argue for reductions that favor output growth, while finance argues for rate increases. This conflict exists because the Brazilian debt is almost entirely held by the financial sector.

As shown in Figure 1, during the 2000–11 period, which was the only period with availability of such data, mutual funds held an average of 42.4% of Brazilian domestic debt securities; banks and other financial corporations held an average of 34.2%; non-financial corporations and individuals held an average of 10.3%; and banks, other financial corporations, and mutual funds held most of the remaining average of 13.1% as bound securities. ⁴ These statistics demonstrate that finance was the major beneficiary of the state’s indebtedness and the policies that aimed to maintain the trustworthiness of the debt. Nevertheless, in this period of high interest rates, industrial and merchant capitalists could have diverted some investment funds into the financial sector and profited as well. This dynamic can be inferred from the evolution of public debt bonds and investment in the real economy. Whereas public debt bonds rose from an average of 13.1% of GDP during the 1991–4 period to 32.4% during the 1995–2011 period, gross fixed capital formation (GFCF) fell from 19.1% to 17.2% (see Figure 1).

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Figure 1.

Domestic debt securities held by the public and gross fixed capital formation.

Despite extensive neoliberal rhetoric arguing for a non-interventionist state, finance has not ignored politics in running its business. Unlike other countries with tighter parliamentary oversight of the economy, Brazil’s executive-led economic technocracy has exerted near-absolute control over the country’s economic policies. This structure can most clearly be discerned in the central bank; since the Real Plan, it has been run by officials with tight connections to multilateral agencies, banks, fund managers, or brokerages. These organizations hire central bank governors either before entering or after leaving office. Since the Brazilian central bank’s monetary policy committee was established, in 1996, 24 of the 38 people who have been part of it have fit this pattern. ⁵ Furthermore, in several instances, the central bank board secretly met with executives of large banks and mutual funds to discuss the economy (Pinheiro and Lirio, 2007).

Some other connections between the government and finance were even tighter. One clear example is the Minister of Finance from Lula’s three first years in office, Antonio Palocci, who was responsible for maintaining the economic orthodoxy consolidated during the Cardoso presidency (1995–2002). Returning to the scene as the czar of Dilma Roussef’s cabinet, Palocci became involved in suspicious businesses that pushed him to resign again. However, his fall was preceded by intense resistance from the largest private banks, amongst them the Spanish Santander (Studart, 2011), which was identified as one of the companies associated with Palocci’s suspicious activities that led to his resignation (Colon, 2011). Indeed, Palocci’s relationships with the financial sector dated as far back as the early 2000s. Then, Palocci, the mayor of Ribeirão Preto, convinced his party’s other mayors in the region to maintain their business relationships with the Spanish bank Santander in spite of their protests against the privatization of the Banespa bank, which was eventually acquired by Santander (Colon, 2011; Studart, 2011).

Unlike industry, agribusiness, and even labor, finance does not enjoy explicit parliamentary representation. This lack of representation is not illogical because the Brazilian parliament is weak in the arena of macroeconomic policy. For instance, unlike the US, Brazil does not have a debt ceiling imposed by the legislative body. However, finance does not need formal legislative representation to have its interests heard by the state. Every day, the Brazilian central bank surveys approximately 200 companies – a group primarily consisting of banks, mutual fund managers, and brokerages – regarding their expectations of inflation, exchange and interest rates, GDP growth, and other related economic indicators (Banco Central do Brasil, 2012a). In this situation, it is worth keeping in mind that formal economic models do not simply represent economic phenomena but might also create them (Preda, 2007). The correlation coefficient between the interest rates expected by the surveyed companies and those stipulated by the central bank during the 2001–11 period was approximately 0.99 (Banco Central do Brasil, 2012b).

This state of affairs is evidence of Brazil’s search for conditions worthy of the trust of rentiers over the last decade and a half. The emphasis has been on the institutionalization of an environment in which investors can assume with confidence that they will be privileged over other class fractions in the distribution of social wealth. To support this assertion, I analyze three policies that have created an institutional framework that has granted substantial and stable flows of the wealth collected by the state to the financial sector.

Release of Federal Tax Revenue Entitlements

The destinations for wealth that is temporarily appropriated by the state can be chosen in several ways. Each one has advantages or disadvantages for various classes or class fractions. For instance, this wealth can be distributed through a state outlay that eventually determines which social fraction takes precedence over others. Additionally, some stability for wealth distribution can be assured through legal mechanisms that earmark tax revenues for certain types of expenditures. Such was the intent of the Brazilian Constitution of 1988, which mandated that the federal government dedicate no less than 18% of tax revenue – excluding social security contributions – to the maintenance and development of the educational system. Additionally, it earmarked all revenues from social security contributions for welfare policies related to health, pensions and retirement, and social assistance.

This framework granted a significant portion of the population a minimum level of education, health, and other welfare services provided by the state. In doing so, the 1988 Constitution made the class struggle for state outlays more complex than it would have been if such expenditures had been made fully discretionary. Nevertheless, this struggle did not prevent reductions in the benefits gained by the lower classes. The preliminary phase of the 1994 Real Plan rolled back the achievements of 1988: the government established a mechanism that allowed it to release a significant portion of tax revenues whose destinations had been previously earmarked for welfare programs. This mechanism was called the Emergency Social Fund, whose main source of funding was 20% of the federal tax revenue originally set aside by the Constitution to fund education, health, and social assistance. Funds earmarked for pensions and retirement were not affected. After successive extensions, the measure reached its contemporary form, known as the Release of Federal Tax Revenue Entitlements (RTE, or DRU in Portuguese), which will be maintained at a rate of 20% through at least 2015. ⁶

The RTE gave the government more freedom to decide upon the fate of a significant portion of budgetary expenditures. In this case, neoliberals and monetarists did not mind violating their valued axiom favoring policy rules over policymaker discretion. In fact, the RTE explicitly replaced clear rules guiding some state allocations with increased discretionary government power. The neoliberals’ and monetarists’ real problem with the existing policy was not the existence of clear rules but the groups to whom those rules catered. The original constitutional rules favored expenditures on public health and education instead of finance’s preferred public debt interest. Thus, they were not considered rules that were relevant to the axiom of ‘rules instead of discretion’. In a subtle way, the RTE informed creditors that the released moneys would not be automatically earmarked for servicing the public debt. However, they would not be earmarked for any other particular purpose. Instead, the released moneys would be open to dispute and redistributed according to the relative power of different classes and other social fractions vying for the budgetary resources.

During the 1995–2011 period, the RTE led to an increase of approximately US$265 billion in the resources available for discretionary allocation by the federal government. This sum was equivalent to an average of 10.6% of federal tax revenues (see Figure 2). At the beginning of this period, that portion was considered necessary by the government to address the immediate fiscal squeeze resulting from the reduced ‘inflation tax’ associated with lower inflation. One notices in Figure 2 how difficult it was to reach stability in terms of the primary fiscal indicators in the first phase of the real (through 1998). Indeed, the main point is that the government decided that it had to have mechanisms to service the public debt, and the RTE met this requirement.

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Figure 2.

Release of federal tax revenue entitlements and primary fiscal results.

The increased freedom in allocating expenditures must nevertheless be qualified by considering what happened after 1999. In that year, inflation targeting was adopted as a substitute for exchange rate pegging for inflation control. In each of the following years except 2009, the released funds have served entirely to form primary fiscal surpluses, as shown in Figure 2. I will approach the primary fiscal surplus in a later section, but it is necessary to discuss it briefly to clarify the point at hand. The surplus is equal to the difference between public revenues and non-financial expenditures. Thus, the very existence of a primary surplus means that the total revenues have exceeded the total expenditures, excluding the accrued interest on the public debt. In practical terms, this surplus acts as a provision to pay interest on the public debt.

From the data in Figure 2, one may conclude that keeping the primary surplus greater than the increase of the released share – the RTE – represents an additional effort to contain non-financial spending relative to total non-earmarked spending. To form the observed primary surpluses from 1999, the government also claimed portions of tax revenues that were not earmarked, and the new tranche was fully intended to eventually pay interest on public debt in 1999–2008 and 2010–11. In 1995–8 and 2009, this goal was partially realized.

Despite the traditional (leftist) anti-creditor rhetoric of Lula’s Workers’ Party, his presidency marked a deepened Brazilian commitment to paying the interest on its public debt. In Cardoso’s second term (1999–2002), the average portion of the primary fiscal results that overcame RTE represented 2.8% of the federal taxes collection; in contrast, during Lula’s two terms (2003–10), this figure rose to 3.5% (see Figure 2). Not surprisingly, the country’s risk spread fell from over 2,000 points at the time of Lula’s election to 525 points by the end of his first year in office (Instituto de Pesquisa Econômica Aplicada, 2012a).

To the extent that the primary goal of the RTE was to form primary fiscal surpluses, it in fact removed resources from education and social security to essentially earmark them for servicing the public debt. Finance could now count on a virtually earmarked share of tax revenue, just as education and public health could. This practical earmarking for finance was not guaranteed by the Constitution, as it had previously been earmarked for social security or education. Nevertheless, no constitutional constraints were imposed on the ruling classes regarding their appropriation of the portions that were released in 1994.

The RTE was a decision that clearly revealed the class character of the Brazilian state by putting the funds that it had wrested from the ruled classes at the mercy of financial appropriation. It would prove to be the first step in granting an important advantage to the finance sector in the class struggle over surplus value transitionally appropriated by the state. However, as this change did not explicitly earmark the funds for the payment of interest, other institutional devices were added to the RTE to further favor the financial class. These additional devices are the focus of the next two sections.

Inflation Control and Inflation Targeting

In the three decades following Second World War, the major socioeconomic concern was full employment. The Keynesian consensus was built around this concern, and it brought some interests of capital and state together with those of the workers. Since the end of the so-called ‘golden age of capitalism’ – i.e. from the 1970s onward – inflation control gained increased attention and began to guide the concerns of both the state and the capitalists. Even workers, at least those who were employed, were to some extent convinced to align themselves with this development. Monetarism was present from the early postwar years in the prescriptions imposed by the IMF on the countries that sought its help (Babb, 2007). However, only when monetarism became hegemonic in mainstream economics did inflation become equally hegemonic in the concerns and practices of governments.

Similar to many other movements with roots in the center of global capitalism, the focus on inflation reached Latin America, where several countries directed their efforts toward containing it. In Brazil, this movement became politically legitimate to the extent that inflation was ingrained in social representations as a type of social catastrophe. Inflation became synonymous with national crisis and colored important events in national life beginning in the mid-1980s. The process began with the quixotic figure of ‘Sarney’s inspector’ – Fiscal do Sarney, in Portuguese – which was a campaign that urged ordinary people to oversee retail prices during the Cruzado Plan (1986). Such a process politically culminated in the presidential election of Cardoso, who was assigned responsibility for carrying out the Real Plan (1994), which finally conquered inflation. After a worldwide succession of crises, the most severe of which were in Southeast Asia in 1997 and Russia in 1998, the Real Plan collapsed in early 1999. Since then, inflation has been kept under control through inflation targeting.

Referring to Louis Bonaparte’s France, Karl Marx once said that a ‘society is saved just as often as the circle of its rulers contracts, as a more exclusive interest is maintained against a wider one’ (1968 [1852]: 104). Although modern Brazil may be an economy ‘saved’ from high inflation rates, it has had to pay the cost of favoring the financial fraction of capital, expanding the exploitation of labor, and reducing welfare policies for society’s poorest people (I will discuss this in detail in the next section). Figures 1, 2, and 3 display some indicators that summarize the developments resulting from the Real Plan and the measures that followed the Plan.

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Figure 3.

Inflation, fiscal deficit, and public debt.

As observed in Figure 3, reduced inflation was accompanied by increased public debt, which, in turn, was fueled by high interest rates. During the 1995–2011 period, these rates had an ex post real average of 11.8% per annum (Instituto de Pesquisa Econômica Aplicada, 2012e). We emphasize that both debt and fiscal results have demonstrated significant stability since the Real Plan. After 1995, when inflation was lowered dramatically, public debt started to climb. Although the trend reversed in the early 2000s, the reduction was smooth, and the debt level remained higher than it was prior to 1995. Here, one sees a financial notion of sustainability, which differs from the ideological meaning that bourgeois economists give to the term ‘sustainable’ – namely, debt should be supportable by the budget. From the perspective of the financial class, sustainable actually means that both the debt and fiscal deficit should be affordable and continue to exist to foster financial accumulation.

This model of inflation control through high interest rates and the consequent increase in interest on public debt expenditures has also led to significant impacts on key welfare outlays since 1999, when inflation targeting was adopted. As shown in Figure 4, expenditures on health, education, unemployment insurance, and other miscellaneous welfare items – under the label ‘Welfare (others)’ in Figure 4 – fell from an annual average of 4.0% of GDP during the 1995–8 period to 3.3% during the 1999–2011 period. In contrast, interest expenditures moved in the opposite direction and rose from 3.3% to 5.0% of GDP between these periods. It is worth comparing these figures to the social programs that rose to prominence in the mid-2000s. Because of social programs and the appreciation of pensions tied to the legal minimum wage, pensions and assistance rose from an average of 7.7% to 9.2% of GDP between the 1995–8 and 1999–2011 periods. The increase in interest (1.7 percentage points) and the reduction in ‘Welfare (others)’ (0.7 percentage points) combined (a swing of 2.4 percentage points) to more than offset the increase in pensions and social assistance (1.5 percentage points).

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Figure 4.

Selected welfare expenditures and interest on public debt.

There are not enough data to precisely determine how many people are favored by each group of expenditures shown in Figure 4. It is reasonable to presume, however, that pensions, social assistance, and other welfare state outlays benefit far more people than do interest expenditures. Relatively few financial capitalists appropriate the major portion of interest: banks, mutual funds, and other financial companies held approximately 90% of the federal public debt bonds (see Figure 1). Meanwhile, the majority of the population – workers, their families, and the poorest people – depend on state expenditures on social security, unemployment insurance, education, health, and other needs.

The effects on labor income of class relations developed through state finance are even more striking; the income appropriated by labor has been lower than that appropriated by capital during most of the period under analysis. As shown in Figure 5, the outcomes of the neoliberal and financial changes in the Brazilian economy since the Real Plan have been consistently unfavorable to the working classes. The gap between the labor and capital shares of total output has considerably widened in favor of the latter. Figure 5 shows the distribution of total income – represented here by GDP – between the main appropriators of the produced wealth. One can see that in the early 1990s, shortly before the Real Plan, labor and capital alternated in terms of which group appropriated the largest portion of GDP. After 1994, labor did not appropriate the largest portion again until 2009. During the 1995–2008 period, the income designated for both owners and self-employed persons exceeded the labor share by an annual average of 3.3% of GDP (see Figure 5).

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Figure 5.

Functional income distribution.

Inflation control through increased interest rates is not the only driver of this widening gap, but it is a contributing factor. Financial capitalists are not the only ones seeking to accumulate surplus through finance; Marx’s ‘functioning’ capitalists – i.e. industrialists and merchants – also seek to do so as interest rates rise. Although functioning capitalists may not divert their capital into financial assets, the rising rate will serve as a measure of minimum profitability for their own productive activity because the interest rate is the opportunity cost of their capital. Thus, functioning capitalists are pushed to increase their rate of labor exploitation to extract enough surplus value to achieve a target profit rate, which must now be sufficiently high to allow additional appropriation by finance. Evidence for this dynamic can be observed in the fact that from 1995 to 2011, the real output of Brazilian industry grew by approximately 76.8% while hours worked fell by approximately 9.1% (Instituto de Pesquisa Econômica Aplicada, 2012b).

The fight against inflation enjoyed immense support among those who suffered from price increases due to a lack of income protection; these problems aligned some of these people’s financial interests with the neoliberal agenda (Potter, 2007). This combination served to sustain the hegemony of finance by coordinating its interests with the interests of those over whom that hegemony was exercised. As noted by Przeworski (1985), economic hegemony is maintained only if such coordination exists; that is, it is maintained if the ruled classes’ interests are satisfied to some degree. Thus, if these classes want low inflation as protection against the implicit inflation tax, they may agree to support high interest rates to maintain an affordable inflation level.

Although it is true that the inflation tax affects the lower classes most severely, it is also true that inflation erodes the capital gains or even the original capital of financial investors. Nevertheless, this fact was not mentioned during the discourses justifying the stabilization plans. Moreover, many of the measures used to combat inflation have reduced the incomes of unemployed people. For instance, the unemployment rate in Metropolitan São Paulo – where Brazil’s highest levels of economic activity and population are concentrated – rose from an annual average of 11.5% to 15.9% between the 1985–94 and 1995–2011 periods (Instituto de Pesquisa Econômica Aplicada, 2012d).

Concerning the means of inflation control, the period of the real should be divided into two phases. In the first phase (1994–8), inflation control was pursued by overvaluing the domestic currency relative to the US dollar; this strategy was the so-called ‘exchange rate pegging’ policy. Its main effect was to stabilize the prices of tradable goods in the international market, which was also reflected in the prices of goods traded domestically. Another effect was to encourage imports and discourage exports, which negatively impacted the balance of payments. This deficit had to be offset by attracting foreign capital. The primary methods of capital attraction were high interest rates and increased freedom of capital withdrawal.

After a succession of crises in Mexico, Southeast Asia, and Russia during the 1995–8 period, which led to attacks against the Brazilian currency (the real), the exchange rate pegging policy was no longer sustainable. In January 1999, the government allowed the exchange rate to float. Nevertheless, at its first meeting after that, in March 1999, the Brazilian central bank’s monetary policy committee (Copom) signaled that the end of exchange rate pegging was not the end of the nominal anchor. That role would be assumed by the interest rate instead. At that same meeting, the Copom raised the nominal basic interest rate (the Selic rate) from 25% to 45% per annum (Banco Central do Brasil, 1999). Fearful that the float of the exchange rate could result in hyperinflation, the Brazilian government eventually acceded to inflation targeting in June 1999 (Arestis et al., 2009).

Since then, Brazilian interest rates have remained among the highest of the world’s major economies. These rates were attractive to the financial industry, which was consistent with the position of the central bank on foreign credit as fundamental to inflation control. In just one month (March 1999), when Copom raised the Selic rate, the finance sector reduced its investments in bonds that were primarily indexed to fixed rates; consequently, the share of public debt indexed to the Selic rate rose from 57% to over 68% (Banco Central do Brasil, 2012d). In the long run, between the 1995–8 and 1999–2011 periods, the average portion of bonds tied to the Selic rose from 29.6% to 47.7%, whereas the portion tied to fixed rates fell from 44.5% to 22.1% (Banco Central do Brasil, 2012d).

In initiating this new phase, the central bank stated that monetary stability under a floating exchange rate would be guaranteed by compatible fiscal and monetary austerity policies. In doing so, the central bank used the instrument over which it had absolute control – monetary policy – and signaled to the rest of the state apparatus that even stricter fiscal austerity would be needed to support the inflation control measure. Therefore, there was a transfer of problems and imperatives; the restrictive monetary policy imposed restrictions on fiscal policy. Thus, the fiscal policy needed to be austere to accommodate the tightness of the monetary policy. This combination of policies revealed a contradiction between the monetary policy and the alleged need for fiscal austerity, as it increased the expenditures on public debt interest (see Figure 6). These facts also show that the Lula government continued in toto (Prates and Paulani, 2007) or even deepened the monetary and fiscal policies pursued during Cardoso’s last term in office (Mollo and Saad-Filho, 2006).

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Figure 6.

Fiscal results and accrued interest on public debt.

With the adoption of inflation targeting, the high interest rate policy set up before the Real Plan obtained important institutional support. Its cornerstones were calls for transparency and strong signals of how the government intends to behave in the monetary realm. These foundations are characteristic of the mainstream economic discourse. This concern over transparency would be reaffirmed by a legal determination that the central bank should take whatever measures were necessary to keep inflation close to the publicly announced targets. These policies matched the financial view that economic policy should be guided by rules rather than policymakers’ discretion. Through these rules and emphases, an institutional apparatus with a clear class character developed: finance would still receive the largest share of the social wealth redistributed through the state fiscal apparatus.

Fiscal ‘Responsibility’ and Primary Fiscal Surplus

Throughout history, terms with impressive symbolic and ideological force have been established. The ideas and images they evoke can guide the actions of individuals and organizations, including the state. Some prominent post-Second World War examples include terms such as ‘full employment’ or ‘economic development’. Those who lived under dictatorships might choose ‘democracy’, and a more recent example is ‘inflation control’. These terms were all presented to society as universal values, as if their advent would benefit society equally across its classes.

A currently prominent word is ‘responsibility’. It is sometimes accompanied by adjectives such as ‘social’ or ‘environmental’ and has served as an important propaganda tool. Today, it is presented as imperative for not only citizens but also the state to be responsible. If companies are expected to be socially responsible and all individuals are expected to be environmentally responsible, then governments ought to be responsible about fiscal issues. In this sense, after its political and economic stabilization, the Brazilian state was required to promote certain institutions particularly important to the current stage of capitalism. Under the ideological neoliberal assumption that the state spends liberally and frivolously, it was assumed that strong institutions were necessary to contain such an impulse. Within this context, the concept of ‘fiscal responsibility’ was boosted to the top of the political agenda.

This so-called responsibility is not a value in itself. It is not the case that more fiscal discipline is more responsible and better for everyone, although this assumption is held in mainstream evaluations regarding governments at all levels. Words assume an ideological shape if they are established as incontrovertible truths and come into existence because of the prioritization of certain conditions and the concealment of others. More than any other device, the Brazilian ‘fiscal responsibility law’ (FRL) deserves special analysis to grasp the state’s class character.

Since its promulgation in 2000, the FRL has been celebrated by the mainstream media, economists linked to finance and academia, and many others who rely on the simplistic rhetoric that the state spends too much. It turns out to be simplistic because it fails – not unintentionally – to address the fundamental need to consider for whom the state spends and from whom it extracts what is spent. To understand the class character of this fiscal issue (O’Connor, 2002), one should examine not only what the law does but also what it does not do, as the failure of the law to address some issues had consequences.

The FRL has declared as its main goal the establishment of standards for the responsible management of public finances. This goal is understood to essentially require the fulfillment of fiscal goals and compliance with borrowing limits. To achieve these aims, the FRL determined that the budget guidelines law (BGL) – a law edited annually that disciplines the following year’s budget preparation – must establish targets for revenues, expenditures, nominal and primary fiscal results, and debt limits. If the projected total revenue does not offset the goals of the primary or nominal fiscal result, the FRL also required that spending must be limited as necessary to achieve balance. However, expenditures on legal and constitutional obligations must not be part of that limitation. Among those legal obligations are funds intended for the debt service payments.

At least two points deserve mention here. The first and most obvious is the exception made by the FRL for debt service expenditures. This exception is the crucial area of passivity within the bill that is equivalent to a strong action. Although it does not literally require action, it nevertheless grants privilege to a certain class fraction, namely, the creditors of public debt. In the case of state financial difficulties, the creditors’ share of collected taxes will not be sacrificed initially. In sum, the spirit of the FRL is that it will not impose any obstacle to the state in meeting its obligations to finance. Actually, the FRL does the opposite: it puts finance at the top of the list of beneficiaries from the state’s transfer payments.

A less obvious point about the class favoritism promoted by the FRL is the primary fiscal result target. Both this target and the nominal fiscal result target must be established each year by the BGL. However, the treatments given to these two types of fiscal result differ. The annual goals for primary results – non-financial revenues minus non-financial expenditure – are established to pay interest on public debt. At the same time, the goals regarding the nominal fiscal result and the outstanding debt goals are merely announced but not set as explicit targets. In every BGL since the sanctioning of the FRL in 2000, the targets of the primary result have been set in surplus. The nominal goals, however, have always been set in deficits.

It is certain that the goals of the nominal surplus would also meet the creditors’ expectations of having their loans paid back. After all, having reached such a surplus, the state would have met all obligations. However, the state has never reached a fiscal balance. Capitalism, particularly the finance sector, depends on state deficits. Thus, if the conditions of the economy and its impacts on public finances project a nominal deficit in the budget preparation process, targeting a primary surplus is a relatively safe means of ensuring a short-term flow of interest payments. Such has been the case in Brazil, as shown in Figure 6. During almost the entire period of analysis, Brazil has been achieving primary surpluses (annual average of 1.7% of GDP). Nevertheless, these surpluses have been outweighed by the interest on the public debt (4.6% of GDP) and have thus led to recurring nominal deficits (2.9% of GDP).

As we have observed in the section on inflation control, the period of the real should be divided into two phases to reveal a dramatic change in fiscal policy and a deepening concern of the state in meeting the interests of the financial class. During the first phase (1995–8), the primary surpluses were, on average, 0.3% of GDP. This index rose to 2.1% during the 1999–2011 period (see Figure 6). The surpluses rose to meet the increasing interest on public debt caused by the rising interest rate, which had been adopted as the nominal anchor of the real after the collapse of exchange rate pegging in early 1999. As a result, the annual average of accrued interest on public debt rose from an average of 3.3% of GDP during the 1995–8 period to an average of 5.0% of GDP during the 1999–2011 period (see Figure 6).

The importance of the difference between the nominal and primary results is not merely an empirical question revealed by the Brazilian case and characterized by the sustainability of the former in deficits and the latter in surpluses. There is a theoretical argument that the concept of a primary fiscal surplus fundamentally favors finance, whatever the context may be. To understand this question, we must not interpret the state budget as a bureaucratic process; instead, we must see it as an arena in which political actors are driven by the interests that shape class struggles (O’Connor, 2002).

In decisions related to state finances, social fractions mobilize to defend their interests and influence the related economic policies. If the primary target is set in surplus, the state essentially announces in advance that a portion of the state budget will no longer be in dispute. The struggle on the budget has already occurred, and the chief beneficiary is predetermined to be the finance class. The difference between the equations representing each type of result makes this point clearer:

The very existence of the primary result reveals a class choice by the state. More specifically, this result reflects a choice to protect capital’s financial fraction. If one considers the nominal fiscal result, this accounting subterfuge also uncovers the ideological character of the discourse about responsibility propagated through the FRL. This law simply indicates with whom Brazil’s fiscal policy can be considered sympathetic. The combination of primary fiscal surpluses and nominal fiscal deficits shows that the Brazilian government has been fiscally responsible from the perspective of financial class insofar as the interests of this class have been prioritized.

The primary result removes the nominal interest on public debt from the political debate and from the struggle for the resources collected by the state. Debate and dispute are thus restricted to the levels of revenue – consisting mostly of taxes – and non-financial expenditure. As a result of this class struggle, the trend is towards a reduction of the latter and growth in the former. In Brazil, this trend can be clearly observed in the evolution of combined federal taxes and state sales taxes, ⁷ which rose from an annual average of 16.7% to 20.8% of GDP between the 1986–94 and 1995–2011 periods (Instituto de Pesquisa Econômica Aplicada, 2012c). It has to be emphasized that the increase in the tax burden was regressive; that is, indirect taxes – e.g. taxes on consumption – rose more than direct taxation – e.g. taxes on income and property. Between the 1986–94 and 1995–2011 periods, the average annual indirect taxation increased by 2.5% of GDP, whereas direct taxation only increased by 1.6% of GDP (Instituto de Pesquisa Econômica Aplicada, 2012c).

Since the advent of the FRL, one belief has been that Brazil entered a phase of greater fiscal responsibility by imposing restrictions, including penal threats, on government officials regarding the implementation of state spending. As stated by Loureiro and Abrucio (2004: 60), the FRL allegedly established a ‘political culture of fiscal responsibility’ in which it would be difficult to adopt populist and irresponsible practices in the management of public finance. There is no denying that this fiscal culture has become more robust, as evidenced by the criminalization of spending that violates the FRL. However, this analysis is incomplete if one considers to which areas of fiscal policy the state decided to grant privilege and in which areas it decided to maintain discretion.

The law might have hindered ‘irresponsible’ practices if it were not biased against the type of expenditure it controls and in favor of those that remained exempt from any control. For example, the FLR states that the underwriting of new compulsory and continuous expenditures must be accompanied by a demonstration of an associated source of funds. However, the same law states that this rule does not apply to expenditures on public debt servicing. As the capitalist state spends more than it collects, fiscal responsibility assumes great rhetorical importance in the face of its actual fiscal outcomes. These outcomes have resulted in the repeated raising of taxes and issuance of debt to balance the books. It is true that the FRL prescribed debt limits; however, these limits were set up only for the state and municipal levels and not for the federal government, which owes the majority of the Brazilian public debt.

Conclusion

In this study, I sought to argue that in the current stage of capitalism, the Brazilian state demonstrates a class character biased toward finance when we consider the different fractions of the capitalist class. This bias can be seen in the important macroeconomic policies established since the Real Plan, all of which were guided by a finance-based logic of accumulation. To develop this argument, I have focused on three of these policies. Specifically, these policies constitute the social representations of an institutional framework that supposedly would have pointed the Brazilian economy in the direction of sustainable economic growth and fiscal responsibility.

One problem that remains under-discussed or even ignored in the public sphere is the fact that the mechanisms that have consolidated contemporary Brazilian capitalism have led to high social costs for the ruled classes. Although these costs are seldom acknowledged in the speeches of government officials and mainstream experts, their rhetoric suggests that these costs were an unavoidable price to be paid and that the costs were supported by society as a whole. This claim is actually an ideological discourse insofar as it places on the same side members of society who, because of economic and political inequality, are on different sides of the state redistributive system.

When the ruling classes and their political representatives decided to release tax revenues from constitutional earmarks, not all people were affected equally. The most severe consequences were suffered by those who depend on public education and health. Funds for these services were squeezed to provide payment to the state’s creditors. When finance influenced state and society to prioritize inflation control, not all classes were favored. First, the creditors of money capital were privileged, especially those who held public debt. The alleged favoritism toward the lower classes resulting from the end of the inflation tax is relative in that interest rates were set high to contain inflation. This policy led to an increased tax burden, which intensified labor exploitation. It is worth mentioning here that labor is the source of all taxable wealth.

Finally, the ideology of fiscal responsibility legitimized the state’s prioritization of paying interest on public debt. Simultaneously, this ideology gave the impression that public finances were being managed responsibly. However, the recurring nominal fiscal deficits and increasing indebtedness suggest that such ‘responsibility’ is more rhetorical than practical. As the spending limit is based on the level of revenue, an increase in revenue via higher taxes authorizes the increase in the spending limit. The distinction between expenditures that have been limited – welfare – and expenditures not subject to any legal limitation – interest on public debt – also distinguishes those who have access to significant portions of the funds collected by the state from those who do not have such access. All in all, the fiscal responsibility ideology, the release of tax revenue entitlements, and the inflation targeting have granted material privileges to finance and made it the hegemonic fraction of capital in the current reproductive stage of capitalism.