The risks of Brazil ignoring its public spending cap

The year 2020 was one of great expectations, not only for the Brazilian economy — but for the global financial landscape. Macroeconomic data corroborated growth expectations, GDP forecasts were promising, retail results enjoyed an upward trend, and inflation was under control. However, Brazil inherited an eye-watering debt-to-GDP ratio, which only got worse during the Covid-19 pandemic. The national debt-to-GDP ratio — already high at 75 percent — became desperate, with the expectation of hitting 100 percent.

Besides crashing into the Brazilian economy like a wrecking ball, the pandemic certainly created a feeling of mistrust among investors with regard to the country’s public spending cap. Brazil has a severe flaw in its constitution, by which spending on personnel — the second-highest public sector expense, behind pensions — cannot be decreased. In fact, this expenditure has to be adjusted for inflation on a yearly basis, causing a direct impact on the spending ceiling.

Furthermore, the government’s public service reform, submitted...