What Will the New Fiscal Framework Be?
We began 2023 knowing that the approval of the proposed constitutional amendment (PEC) on the transition has made it possible to alter the spending cap by enacting a complementary law, and that the execution of the budget in 2023 will lead to a deficit of R$ 230 billion, putting the public debt back on an upward path. Since the progressive weakening (and now death) of the spending cap, the country has been bereft of a fiscal anchor, and the result has been higher risk premiums, in turn increasing the longer term interest rates and widening the gap between the real interest rate and the potential economic growth rate even more.
In other words, the risk has grown of an unsustainable path of the public debt, creating a vicious circle that needs to be broken. Only a new fiscal framework that assures primary surpluses in the medium and long run – accompanied by the necessary political support – can lead to a reduction of the risk premiums, giving the Central Bank support to reduce the interest rate and also keep inflation under control.
Due to Brazil’s already high tax burden, and the fact that a substantial portion of federal tax revenues is transferred to the state and municipal governments, it is not possible to achieve adjustment of the primary surplus without a large increase in the tax burden. Instead, it will be necessary to control public spending, requiring reforms with high political costs, to be withstood by a government whose political support depends on favors meted out to the parties composing its congressional base. Therefore, what is impending is a looser fiscal framework, so the likelihood is high of further spending increases, with effects on the risk premiums.
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