Challenges facing the new government: Fiscal consolidation

BRAZIL ECONOMICS - Report 05 Nov 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

The new government will have to face huge challenges. It will need to move beyond the current sluggish cyclical recovery as soon as possible and then promote acceleration of potential growth. To achieve these goals, it will have to execute an agenda of reforms, of which the most important necessary condition is a fiscal consolidation that permanently alters the debt/GDP path. Without this, the perception of lingering risks will inhibit a resurgence of investments. A fundamental part of the fiscal consolidation is a thorough overhaul of the pension system, to contain growth of expenses for retirement benefits in the private and public sectors, reducing the need for cutbacks in other expenditures (which will have to occur even with a robust pension reform). We reiterate that fiscal consolidation is a necessary but not sufficient condition. To boost the growth rate over the long run, with the production factors in full use, it is necessary to elevate productivity, which due to the end of the demographic bonus is the only route to increase the per capita income of the population as a whole.

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