The Fiscal Disaster of President Rousseff’s First Term
Executive Summary
The word “disaster” to describe the Rousseff government’s fiscal policy is no exaggeration. Primary spending has risen continuously alongside abuse of tax relief measures, resulting in a primary surplus totally insufficient to assure the government’s solvency, whether evaluated based on the concept of the gross debt or the net debt only deducting international reserves.
The Rousseff administration started with primary expenditures of 17.2% of GDP, a figure that rose to 19.8% of GDP in September 2014, while to the same date tax breaks resulted in forgone revenue of around 2% of GDP, causing both the gross and net debt to climb.
The challenge faced by the President in her second term is to carry out a strong fiscal adjustment. In principle this could be gradual, if a credible plan existed to control expenditures and recompose revenues. But the government hates rules of conduct and relies on discretionary decisions, believing piously that higher spending and lower revenues will lead to faster economic growth without aggravating inflation.
Only the initial steps of the second term will reveal whether this mindset has changed. We have to wait for the definition not only regarding the name of the new finance minister, but also the outline of the policies that will be put into practice. But the succession of mistakes that marks the past four years does not paint a pretty picture.
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