A Framework That Falls Short of Resolving the Fiscal Problem

BRAZIL ECONOMICS - Report 10 Apr 2023 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

Given the need to reduce the public debt, the only fiscal framework that makes sense is one that assures reaching of sufficiently high primary surpluses to achieve that goal. Unfortunately, the government’s proposal fails in this task. The arithmetic of the new framework seems impeccable. After all, its professed objective is to limit spending growth to a pace slower than the expansion of net revenue (within an interval) in the 12 months accumulated until June of the previous year, which at some future moment will lead to generation of primary surpluses. Besides this, the government proposes primary result targets until 2026.

However, a careful analysis reveals that the new framework will only be sustainable by achieving large revenue increases during its time frame, and the needed decline in the public debt trajectory would only be reached after 2030. Even if assuming the government manages to collect the R$ 150 billion necessary to eliminate the deficit in 2024 by taxing sectors that are exempt today, it will be hard to increase receipts in subsequent years to sustain the new rule. In this report, we show that if the government manages to raise revenue by R$ 150 billion in 2024 and guarantee a real increase of 3% a year thereafter, with the combined effect of elevating the tax burden in proportion to GDP (with potential GDP growing at 1.8% per year), the public debt will increase continuously, reaching 88% of GDP in 2030.

For the debt/GDP ratio to stabilize in the short run, it will be necessary to severely increase the tax burden, something impossible from a political standpoint. Our fear is that with this framework, the pressures from Lula and his economic team on the Central Bank will rise, eventually browbeating the monetary authorities into reducing the interest rate, which in the vision of Lula and his team would assure economic growth and generate sufficient added revenues to finance the deficits. In summary, the framework announced is fatally flawed, falling far short of what’s needed to achieve sustained economic growth.

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