Brazil’s long-awaited pensions reform bill passed a crucial hurdle late on Wednesday when the nation’s lower house of Congress voted in favour of the legislation after months of wrangling.
Years in the planning, the overhaul is widely seen as essential to restore confidence in Brazil’s economy, which faces the prospect of a return to recession in the second quarter.
By raising the retirement age to 65 for men and 62 for women, the legislation seeks to tackle the government’s precarious fiscal position with savings of $250bn over the next 10 years.
More broadly, investors have seen the bill as a test of whether the administration of President Jair Bolsonaro will be able to pass its broader economic agenda of deregulation and privatisation.
Their hopes were boosted on Wednesday when the pension reform passed a first vote in the lower house of deputies by 379 votes to 131. The bill faces a confirmatory second vote in the house before it moves to the Senate, where it will also be voted on twice. Lawmakers and experts expect the legislation to pass conclusively around September.
The passage of the bill is seen as pressing. Hit by plunging investment and shrinking industrial output, the Brazilian economy contracted in the first quarter of the year. Early data for the second quarter suggest the outlook continues to darken.
“I’d say a technical recession is about 50:50 at the moment. Industry is doing really badly — the key lies in whether the services sector has started to make a recovery,” said William Jackson, chief emerging markets economist at Capital Economics.
After a spike in optimism immediately after his election in October, business confidence has declined under Mr Bolsonaro amid continued infighting between the president and the Congress and supreme court.
“The pessimism of the first quarter of the year has greatly affected investment and this lowers the prospects for growth for the coming years,” said Silvia Matos, a senior researcher at the Getúlio Vargas Foundation in Rio de Janeiro.
“We have lost a lot of time and the population has become very pessimistic, with growing unemployment and falling incomes.”
The pension reform proposal was initiated originally under Michel Temer, Mr Bolsonaro’s predecessor, but it became a victim of political bargaining when the former president was implicated in graft claims.
Since the election of Mr Bolsonaro, however, lawmakers have gradually come round to the idea of reining in Brazil’s vast web of public payments obligations, which have undermined the state’s ability to make crucial investments in health and infrastructure. The country spends almost 13 per cent of its gross domestic product on pensions.
According to the IMF, Brazil’s public debt will reach 90 per cent of GDP by the end of the year.
The economy ministry, meanwhile, has revised annual growth downward from 2.2 per cent at the start of the year to 1.6 per cent in May. Independent economists forecast less than 1 per cent.
“The link between approval of the pension reform and growth is not direct, but clearly it is important. Approval means that we stop walking toward the cliff and there is the opportunity to change course and chart a new path,” said Ana Carla Abrão, a markets analyst at consultancy Oliver Wyman.
If the pension reform passes, the focus is likely to shift to what comes next on Mr Bolsonaro’s economic agenda. Many businesses are keen for the president to use his powers of decree to slash the red tape that they say stifles industry.
There are also growing demands for the country to simplify its byzantine tax system. Average medium-sized Brazilian companies each spend 2,000 work hours a year settling their tax obligations, according to the World Bank.
Alessandra Ribeiro, director of macroeconomics at consultancy Tendências, said there was “a [corporate] consensus that changing the tax system is necessary for the Brazilian economy since it blocks growth and hinders business”.
Future reform efforts will depend to a large extent on Mr Bolsonaro’s relationship with Congress, which has been strained since he took office in January. Last month, the Brazilian president accused parliament of trying to turn him into the “Queen of England” — a leader without political power.
The tension between the executive and legislature was highlighted before Wednesday’s vote when Rodrigo Maia, the house speaker, sought to claim credit for parliament for the pensions bill.
“The construction of the text was a parliamentary construction, and the construction of victory, if it happens, will be parliament’s, not the government’s,” he said.