Fiscal Adjustment: Next Steps

BRAZIL ECONOMICS - Report 12 Dec 2016 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

With the likely final approval by the Senate (second floor vote) of the PEC that freezes spending in real terms, the government will have finished the first step of a profound fiscal adjustment. The second step is the social security reform, with the establishment of a minimum retirement age and harmonization of the regimes for the public and private sectors, along with relatively short transition rules. The government will still have to confront the effects of growth of some expenditures that tend to rise faster than inflation – such as pensions, for example, even if the proposed reform is approved –, which together with the freeze of total spending will continue to require cuts in discretionary spending. But even after completing all these reforms, the administration will still face the risk of explosive growth of the public debt, meaning that after the cycle of structural adjustment of expenditures, it will be very hard to avoid increasing the tax burden.

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