Fiscal Policy: A Picture Without Retouches

BRAZIL ECONOMICS - Report 02 Oct 2014 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

Executive Summary

The primary surplus target of 1.9% of GDP in 2014 will not be met. This comes as no surprise. The surprise comes from the fact that the distance between the “official” target and what is actually achieved will be greater than previously estimated, revealing the magnitude of the fiscal effort that will be necessary in the coming years.

The gross public debt has risen to 60% of GDP, and since Brazil is mired in weak growth, the primary surplus necessary at least to keep this proportion stable is surely greater than the 1.9% target. Additionally, with the tax relief measures accounting for about 2% of GDP (just slightly above the primary surplus target), payment of expenses crucially depends on non-recurring revenues, which by definition are one-time movements that are not repeated in subsequent years.

Reversal of this picture (necessary for the country to keep its investment grade rating) will require a huge and credible effort, which will surely have a bitter taste, from the standpoints both of politics and of economic growth, which is already lackluster, no matter who wins the presidential election.

Now read on...

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