Brazil moves towards fiscal crisis


Author: Fernando Dantas

Source: O Estado de S. Paulo, 13/05/2007

If the current fiscal policy is maintained, Brazil will reach 2014 with a primary deficit of the Union of 1,9% of the Gross Domestic Product (GDP), which could bring serious macroeconomic imbalances, even assuming that the external scenario remains exceptionally favorable. like today. The warning comes from economist Raul Velloso, a specialist in public accounts, and is part of the presentation he will make at the National Forum on Tuesday (see article below)

In 2006, the Union contributed 2,1 percentage points to the primary surplus of 4,31% of GDP (based on the old GDP series). Since 1998, the federal government's primary result has been a key part of the strategy to obtain large primary surpluses in the consolidated public sector, which were fundamental to controlling the explosive growth trend in public debt. The primary surplus excludes interest payments.

Velloso works on the premise that the two major instruments that have made it possible to obtain primary surpluses since 1998 are exhausted: the increase in the tax burden and the reduction, to minimum levels, of public investment. In the first case, he shows, in detail, in the labor appendix, that society's pressure against the continuous increase in taxes has led to the current tax relief policy, which is already an obstacle to the increase in the tax burden.

As for the Union's investments, the study observes that 'they reached a meager 0,5% of GDP in 2005, with public infrastructure in a state of great deterioration'. As an example, Velloso cites the fact that, in 2006, a portion of 83,1% of the roads under state management in Brazil were in a 'bad', 'terrible' or 'regular' state (according to data from the National Transport Confederation) , even after the 'bump-in operation' at the end of 2005.

According to Velloso, 'the maintenance of the current fiscal policy, in a scenario of stagnation in revenue (due to society's resistance to the increase in the tax burden) will lead to a strong fiscal crisis'. For the economist, the deterioration of the primary result may cause the ratio between public debt and GDP to grow again, which could lead to higher interest rates, higher inflation and reduced economic growth.

In order to reach these conclusions, he makes a detailed projection of the Union's expenses, on the assumption that no stronger measures to contain expenses will be taken in the coming years. Velloso notes that expenses with INSS benefits and federal personnel expenses (with active and inactive) correspond to 68% of total primary expenditure. Like almost all other expenditure items, those expenditures are rigid and tend to grow above GDP.

Velloso foresees increases in several other expense items, such as Bolsa-Família. Overall, his projection is that the Union's primary expenditure will jump from 19,6% of GDP in 2006 to 22,1% in 2014, with GDP growing 3% per year, on average, precisely because of the problems created by fiscal policy. As revenues remain practically constant – 19,6% of GDP in 2006 and 19,8% in 2014 -, the Union moves from a primary surplus of 2,1% of GDP to a primary deficit of 1,9% in this period.

The economist also proposes an alternative scenario, in which the government takes several measures to contain spending, such as establishing in the Constitution a ceiling for the expenditure on personnel by the autonomous Powers, setting the maximum value of the growth rate of personnel expenditure on the Executive Branch. and give a real zero readjustment for benefits linked to the minimum wage.

He redoes the projections. Average growth accelerates to 4,5% per year, due to economic stability derived from fiscal policy. In this scenario, the Union's primary surplus jumps from 2,1% of GDP in 2006 to 2,8% in 2014, with expenditure falling from 17,9% to 17,4%. 'The result would be the establishment of a virtuous cycle', he concludes.