The magnitude of the fiscal effort needed and the perspectives for success
When the Temer administration realized that without controlling expenditures it would be impossible to end the explosive growth of the public debt, it submitted a proposed constitutional amendment to Congress in order to freeze primary spending in real terms. This was a correct choice, given that when compared to the alternative of raising taxes, it minimized the costs measured in terms of lost output. However, the spending cap was only an initial political reaction, and now to assure its satisfaction, the Bolsonaro administration has presented a pension reform proposal that would lead to savings of R$ 1 trillion in 10 years. We remind the readers that enacting of a substantially watered-down version will jeopardize spending under the cap, and even with approval of the entire proposal, the government will still have to control other expenditures and obtain more revenues – recurring and non-recurring – to transform primary deficits into surpluses and invert the upward path of the debt/GDP ratio. Brazil’s grave fiscal situation leaves little room for errors regarding a fiscal adjustment.
To stanch growth of the debt/GDP ratio, it is needed an adjustment amounting to 4 percentage points of GDP, moving from a recurring primary deficit of 2% of GDP to a surplus of 2% of GDP.
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