Brazil’s public debt as a proportion of GDP is lower than many other countries that have investment grade status, but almost none of these need primary surpluses to reduce the debt/GDP ratio. On the contrary, due to the low interest rates in those countries, that reduction can happen even in the presence of primary deficits, which in many cases are large. Within a broad sample of countries, Brazil is the country that needs to produce the highest primary surplus to lower its debt/GDP ratio (except for Greece).
We analyze the dynamic of the Brazilian debt in three alternative scenarios. Surpluses lower than those proposed by Levy make the debt/GDP ratio rapidly approach the 70% mark. But we do not concentrate only on exercises of the debt dynamic. In recent years, expenditures have risen at about 0.3% of GDP per year, rising from 14% of GDP in 1997 to 19% at present. That growth has only been possible due to greater revenues, in turn generated by rising percentages of formal workers and increased imports. These factors have run their course, meaning that the government will have to cut spending, not limited only to discretionary spending, or raise the tax burden.
The government is facing huge political difficulties to move in either of these directions. The consequence is a rising probability that the country will lose its investment grade rating.
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