Ambitious objectives are rarely entirely achieved, but in the case of the pension reform, the most recent legislative developments indicate that the country is poised to take an important step ahead. Many actions in the fiscal field will still be necessary to reverse the rising path of the debt/GDP ratio, and others to put the country on track to sustained economic growth. In this respect, perhaps the most important is tax reform, to transform taxes on consumption and services into a true VAT charged at the destination, and to put an end to the fiscal warfare among the states, which is responsible for a huge number of distortions. This will enable the country to advance more quickly toward trade opening, which has already begun with the agreement between Mercosur and the European Union. In the short run, the task is to start the monetary easing cycle as soon as possible, against which the only argument is the fear that this might interfere in the next steps for final approval of the pension reform, a risk that is at most tiny.
There is no longer any illusion regarding weak economic growth in 2019. The government itself (the Finance Ministry and Central Bank) project growth of 0.8%, equal to population growth, keeping per capita income 9% below the level at the start of the cycle for another year. The consequence of this degree of economic depression, which has now lasted more than five years, is the decline of inflation significantly below the target. Since the middle of 2017, the IPCA core rates by exclusion more correlated with the economic cycle have been oscillating substantially below the target (Graph 1), and there has been a strong and steady decrease in the one-year forward projections, for both 2020 and 2021 (Graph 2). According to the tenets of inflation targeting, under these circumstances the monetary authority not only can, but should, cut the interest rate, due to the absence of any risk.
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