According to a recent report published by the World Bank, the Brazilian government overspends and wastes money. The study, “A fair adjustment: An analysis of the efficiency and equity of spending in Brazil,” analyzed eight areas of public spending in Brazil. It graded them based on three criteria: how much of the federal budget they make up; how efficient they are; and how much they contribute to reducing Brazil’s levels of inequality.

The report’s conclusions state that while the Brazilian government has “consistently” increased public spending – to the point of jeopardizing the country’s solvency – the levels of inequality have not been reduced. Brazil’s fiscal deficit has reached 8 percent of the GDP, and the public debt has risen more than 20 percent over the last six years, now totaling 73 percent of the GDP.  The biggest issue affecting Brazil’s economy is its fiscal imbalance. At this rate, the country looks set to reach 95 percent debt to GDP ratio by 2022.


Challenges ahead for the Brazilian economy in 2019

 


President Michel Temer’s administration approved a federal spending cap but failed to pass major reforms that would curb expenses on pensions and end the privileges enjoyed by federal civil servants and ex-military men. President-Elect Jair Bolsonaro has shown signs which have sparked doubts about his true commitment to a pension reform.

The Institute of Applied Economic Research estimates that the organic growth of the current expenses will make it impossible not only for Mr. Bolsonaro but also for Brazil’s future presidents, to comply with the spending cap approved by Congress in 2016.  A study concerning the budget, published by the lower house shows how deep the crisis could be.

Brazilian government spending will be constrained by 2020

The report, “Budget projections: scenarios for 2019-2023 in the context of spending ceilings” says that if federal expenses are not reviewed, mandatory expenditure will be BRL 22.3 billion over the limit established by the spending cap by 2022. The report also shows that between 2010 and 2018, compulsory public expenditure showed a 35.6% increase in real terms. Findings suggest that budget problems could begin as early as 2020, just two years into Jair Bolsonaro’s term. In two years, the portion of the budget that can be freely spent by the government will be negative. This means that the federal budget will be comprised exclusively of expenses that cannot be cut.

The report also has recommendations of what can be done to avoid a future crisis. To contain the increase in compulsory expenditure, the study suggests an alternative scenario, with measures to reduce expenses and cut various benefits, such as sick pay lasting more than six months. It also calls for a review of disability benefit granted more than two years ago for those under 55. According to the study, the actions proposed in the pension system would generate an extra BRL 270.4 billion.


brazil public spending deficit budget recession


Other suggested measures include adjusting the minimum wage according to the inflation of the previous year, starting in 2020, without incorporating the real GDP variation. And a cap on federal government employees wages for one year, meaning no pay increase between 2020 and 2021; in the following two years their wage increases would be calculated by the consumer price index (IPCA)

According to the study, all of these proposals could reduce expenses by almost BRL 500 billion. The spending cap would not be surpassed, but the government would only have money to spend freely in 2021. According to the report, a definitive breathing space would only exist if the pension reform was approved.

MoneyDec 29, 2018

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BY Diogo Rodriguez

Rodriguez is a social scientist and journalist based in São Paulo.