The Risk of Failing to Meet the Spending Cap

BRAZIL ECONOMICS - Report 20 Aug 2020 by Affonso Pastore, Cristina Pinotti, Paula Magalhães, Marcelo Gazzano and Bruno Cordeiro

The spending cap is not a self-applicable fiscal rule. It is a political commitment whose compliance in the coming years will require approval of a set of reforms necessary to impose fiscal austerity by controlling expenditures – not by increasing revenues – establishing conditions for faster economic growth. If these reforms had already been enacted, there would be no need for the cap, because fiscal austerity would already be entrenched. The country is distant from this point, but all the same the risks could be lower if the government would demonstrate unquestionable political effort to enact the reforms, and would indicate willingness to apply all the possible triggers set forth in the constitutional amendment that instituted the spending cap.

In this Special Report, we analyze the nefarious effects of breaking the spending cap, and discuss the reasons we believe a significant risk exists that this will occur, with negative reflections on the recovery of the Brazilian economy.

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