Gross Debt or Net Debt: Which Best Measures the Fiscal Imbalance?
The gross debt of the general government, in the Brazilian concept, is the sum of the stock of bonds sold by the Treasury and the repo transactions contracted by the Central Bank. In turn, the net debt, in the only definition that makes economic sense, is the gross debt minus international reserves. When both concepts are used, the sale of international reserves reduces the gross debt (the Central Bank has to sterilize the monetary base reduction from reserves sales with repo operations). Since the relevant interest rate to gauge the primary surplus that stabilizes the debt/GDP ratio (gross or net) is the implicit interest rate of the respective debt, which is lower on the gross debt and higher on the net debt, the final result is virtually the same primary surplus. In this report we show that using the net debt in this concept does not distort the estimate of the necessary primary surplus, with the advantage that a sale (purchase) of reserves does not change the net debt concept, which is not the case of the gross debt.
Secondly, we develop arguments contrary to the sale of reserves to increase public spending. These arguments rebut the propositions that: a) the spending cap would be maintained for all primary expenditures; b) but there would be authorization to spend a high amount in proportion to GDP (in infrastructure investments, for example), with resources obtained from selling reserves. It would be a way to simulate compliance with the spending cap. We show that in this case, there would be an increase of the deficit in the balance of payments (which is already happening), accentuating the outflow of capital and aggravating the crisis instead of attenuating it.
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