Brazil’s Finance Minister Fernando Haddad argued on Wednesday at a joint meeting of the World Bank Group and the International Monetary Fund for more restrictive fiscal policies to lower interest rates and reduce risks to economies.
“In the current inflationary environment, a more restrictive fiscal policy can help monetary policy rebalance supply and demand, reducing the need for higher interest rates for longer and thus reducing the risk of financial instability,” Mr. Haddad said in a statement on behalf of Brazil and 10 other countries during this year’s meeting in Morocco.
Mr. Haddad highlighted Brazil’s new fiscal framework, which took effect in late August and replaced the previous spending cap.
“Under the recently enacted fiscal framework, expenditures will be constrained to grow at a pace that is lower than revenues and is subject to a ceiling, although there is a countercyclical element which establishes a minimum spending growth rate of 0.6 percent to maintain the current spending per capita level,” he added.
For Mr. Haddad, “a soft landing for the global economy is still not assured.” His assessment, however, clashes with that of the IMF. “Projections are increasingly consistent with a soft landing scenario,” with countries being able to “bring inflation down without a major downturn in activity,” the fund wrote in its latest World Economic Outlook report.
“Core inflation has fallen but is still above target in many jurisdictions. Economic activity seems to have lost momentum in recent months. Moreover, debt has risen to very high levels, and buffers have been run down, narrowing the policy space,” Mr. Haddad said.
The Luiz Inácio Lula da Silva administration has set bold fiscal targets, starting with a zero primary deficit by the end of 2024. Markets, however, do not believe the government can pull it off.
A Quaest poll of 82 executives of Brazil’s top investment funds shows that 95 percent of them believe the deficit will not be zero in 2024 — with 86 percent adding that the goal will remain out of reach even if the government manages to approve all of its revenue-boosting proposals, such as taxing the super-rich.
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