Brazilian government’s fiscal framework is no anchor

After many weeks of delays and speculation, on March 31, Finance Minister Fernando Haddad presented the fiscal framework with which the new government intends to replace the controversial spending cap rule that has been in place, albeit with minor modifications, since the end of 2016. 

The cap rule, as designed, induced fiscal austerity and translated any growth in government revenues into declining public deficits (or rising surpluses), resulting in a declining debt-to-GDP ratio, a dynamic welcomed by investors, rating agencies, and multilateral institutions.

The fiscal framework cannot be accused of lacking ambition. According to the presentation following Mr. Haddad’s speech, the framework “guarantees” that Brazil can have its cake and eat it too, with more public investment, more “poor people back in the budget,” less inflation, lower interest rates, more stability, and a return to the investment grade status lost during the Dilma Rousseff government.

The unpleasant exercise of number crunching renders much less sunny conclusions. The first one is that the government’s numbers for the trajectory of budget balances and debt stock only make sense under rosy macroeconomic premises. 

The Finance Ministry’s economic policy unit forecasts average annual GDP growth of 2.3 percent during the current presidential term, much higher than current market expectations (1.5 percent in the latest weekly Central Bank survey) and the most frequently used estimates for Brazil’s potential growth (between 1 percent and 1.5 percent). 

The last time Brazil achieved that kind of growth was before the 2015-2016 recession, when the country...