The (Mis)trust in the Quality of the Fiscal Framework

BRAZIL ECONOMICS - Report 21 Aug 2023 by Affonso Pastore, Cristina Pinotti, Paula Magalhães and Diego Brandao

With the modifications made in the Senate, the text of the fiscal framework has returned to the Chamber of Deputies for approval, so the final wording is still unknown. Nevertheless, it is already known that the increase, in real terms, of primary spending (to occur in an interval between 0.6% and 2.5% a year) will have to be financed by still uncertain increases in revenues, through which the government expects to attain a nil primary result in 2024, and primary surpluses of 0.5% and 1.0% of GDP in 2025 and 2026, respectively.

With a tax burden greater than 30% of GDP and society averse to increases in the rates of existing taxes, the government has chosen changes in regulations and laws to increase receipts. But approval of these changes faces huge difficulties and ever-present possibilities of judicialization. Therefore, the strong uncertainty about meeting with the targets can easily lead to an upward path of the public debt until 2026, and this has contributed to keeping the risk premium high, as clearly reflected in the yield curves and prices of other assets.

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