The Fiscal Disaster and Risk of Populism

BRAZIL ECONOMICS - Report 13 Oct 2015 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

Brazil needs a broad and deep fiscal policy reform. However, over the past 10 months, the government, politically weakened, has only managed: to place an insufficient amount of budget allocations on contingency; to enact a timid reform of the rules on unemployment insurance, salary bonus and widow pensions; to roll back some of the tax breaks on payroll; and to realign electricity rates, reducing expenses from the Energy Development Account. Even if all the primary surplus targets set until 2018 were met, they would fall far short of stabilizing the debt/GDP ratio, which continues to climb steeply. The target for 2015 (considering abatements, which can reach R$25 billion) will lead to a primary deficit that can reach 0.3% of GDP, with a risk of a new primary deficit in 2016 (Graph 1).

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