Execution Of The “Fiscal Framework”: The First Signs

BRAZIL ECONOMICS - Report 24 Jul 2023 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

According to estimates by the National Treasury, to achieve the target of a null primary result in 2024, it will be necessary to obtain additional revenue of R$ 160 billion. The Treasury also estimates that even if this additional revenue is not attained, the gross debt will stabilize at 81% of GDP in 2030 or thereabouts, while if it is achieved, after a period of stability at around 77%, it will start to decline in 2028.

What is the probability the government will obtain a revenue increase of R$ 160 billion in 2024? And what is the likelihood that in 2025 and 2026 it will manage to obtain revenue increases leading to primary surpluses of 0.5% and 1.0% of GDP? As shown in this report, our answers to these questions are the same: the probability is very low. In light of this, what is the probability that with the current fiscal policy, the neutral real interest rate will decline to 3% and potential GDP growth will reach 2.5% a year?

In this case, the response is more categorical: virtually zero. Furthermore, the conclusion that the new fiscal framework will eliminate the risk of explosive growth of the debt/GDP ratio is overly optimistic. Despite efforts to increase revenue, in some cases fully justified, this movement would be unable to meet the primary result targets. With expansionary fiscal policy, the neutral interest rate will be a good deal higher than the Treasury’s rosy projection, reducing the space for the Central Bank to ease the interest rate.

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