Americas

Brazil’s Next Twenty Years of Austerity


Since the turn of the millennium, Brazil has made impressive strides in reducing poverty and inequality and in boosting access to public services. However, Brazil remains one of the most unequal countries on the planet, both in terms of distribution of wealth as well as access to public services. The national government has implemented a variety of social programs to further reduce poverty and boost human capital and equality. However, on December 13, 2016, the Brazilian government passed a law capping government expenditure for the next 20 years. This action comes following the impeachment of Dilma Rousseff in 2016, ending the 13 year rule of the Worker’s Party (PT).

The law, PEC 55, is a proposed constitutional amendment that freezes government expenditure in real terms by only allowing growth in government expenditure equal to the inflation rate of the previous year, a policy that the United Nations has called the most socially regressive budget plan in the world. In addition to international concerns over the implications of PEC 55, 60% of the Brazilian public oppose this measure and protests against PEC 55 have taken place across much of the country. There can be benefits to cutting government expenditure in the long run, but the inability to increase spending may hinder the Brazilian economy and set back the social gains that the country has achieved in recent years.

Brazil has pushed the ratio of debt to GDP down since the turn of the millennium. Brazil’s net debt to GDP ratio peaked in 2002 at 59.9%, the year the PT first won the presidency. From 2002, the national net debt to GDP ratio ticked down every year except once, eventually reaching 30.6% in 2013. Although the national debt increased in 2014 and 2015, it is important to note that in both of these years as well as in 2009, the other year the debt to GDP ratio increased, Brazil was faced with negative GDP growth. This suggests that the Brazilian government actively utilized countercyclical spending policies to stimulate the economy in cases of economic slowdowns. As a result of the new long-term spending cap, Brazil will be unable to continue to address economic challenges with counter-cyclical spending.

Central Government Net Debt vs GDP Growth

Source: International Monetary Fund (IMF). 2016. World Economic Outlook Database; World Bank. 2016. World Development Indicators.

Despite this decline, compared to other Latin American nations, Brazil’s general government gross debt-to-GDP ratio remains high. According to the International Monetary Fund, Brazil’s gross debt was 63.3% of GDP in 2014, similar to the debt ratio of its chronically economically challenged neighbor Venezuela. However, this number is also similar to the level of gross debt held by Uruguay, a nation that few fear is bound for financial ruin. Although Brazil’s gross general government debt is high by Latin American standards, Brazil still holds substantial reserves. When debt is offset by the value of reserves held by Brazil, the nation ranks 6th out of the 11 countries for which the IMF has data, with 33.1% net debt as a share of GDP in 2014.

General Government Net Debt (as % of GDP), 2014

Source: International Monetary Fund (IMF). 2016. World Economic Outlook Database.

Additionally, Brazilian social spending, particularly the Bolsa Familia conditional cash transfer program, has been lauded for its success in reducing poverty and inequality in the country. A study of Brazilian fiscal interventions reveals that in 2009 through the implementation of direct government cash transfers, Brazil was able to reduce the extreme poverty headcount (measured at $2.50 PPP/day) from 15.4% to 11%. Inequality (as measured by the Gini coefficient) was also reduced through fiscal interventions from 0.574 to 0.542, and including government spending on public health and education programs reduced it even further to 0.464. These gains are impressive, but require careful targeting and the government’s willingness to spend in times of economic downturn.

The public expenditure limitations placed on the Brazilian government by PEC 55 may prove disastrous for the South American giant. The social and economic gains that Brazil has seen since the turn of the century are fragile and may be lost if the government is unable to continue funding social programs, public health and education initiatives, or infrastructure and development projects. New limits on public spending could create incentives for interest groups to fight for political priorities at the expense of the most marginalized segments of society. Counter-cyclical spending has allowed Brazil to weather the economic downturns of the past decade largely unscathed, but PEC55 threatens to erode the gains that have been made in Brazil.

 

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