The Recession Depth and Fiscal Consequences

BRAZIL ECONOMICS - Report 30 Mar 2020 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Paula Magalhães

There are two possible reactions to the propagation of the COVID-19: impose social distancing (lockdown), which attenuates the loss of lives; or allow it to evolve until producing “herd immunity”, which happens when the number of people who have been infected is large enough that the virus cannot find enough new hosts at the cost of a huge number of deaths. Besides, it is not yet known how long a contaminated person – with or without symptoms – remains immune, since the virus tends to undergo mutations. Boris Johnson and Donald Trump initially tried the herd immunity approach, but were forced to abandon it. What was inevitable in the Middle Ages – a catastrophic death toll – is not acceptable when there are ways to reduce the mortality rates. In Brazil, some state governments are practicing isolation to various extents, but with strong opposition from Bolsonaro, whose reaction in one headline was “Unfortunately, some deaths will occur. Patience.”

The government should understand that the objective of a civilized society is to save lives and minimize the economic costs. It is necessary to explain to the people that they will not be abandoned, that resources will be brought to bear to help those most affected by the lockdown, with the costs being supported by everyone as soon as the storm passes. Brazil is facing the epidemic with a very fragile fiscal situation, and to minimize the economic cost of fighting the outbreak it will have to do what other countries are doing: wisely use the resources chosen. However, there will be no way to escape from a marked increase in the public debt. In the next few days, we will publish an analysis of the measures already taken by the government and their reflections on the deficit and public debt.

In this report, we analyze the importance of social distancing in saving lives, and then, acknowledging that in such an uncertain situation it is impossible to make projections without incurring potentially large errors, we indicate why the recession will be deep, accompanied by our evaluation of its order of magnitude. Finally, we show that the country will not escape a significant increase of the public debt. However, because of the fiscal fragility, the government will have to pursue more intense reforms. Due to the risk of moving toward a fiscal crisis, the cost derived from the increase of the public debt cannot be postponed to “future generations”. Instead, it will have to be borne in the next few years, through structural reforms even more profound than those currently under discussion in Congress.

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