Itaú BBA - Brazil: The spending cap – Why keep it and how to meet it?

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Brazil: The spending cap – Why keep it and how to meet it?

September 6, 2019

Maintaining the spending cap is critical


For the version with all charts and tables, please open the attached pdf file
 

• The spending cap is the key to rebalancing public accounts. A revision would necessarily imply increases in an already excessive tax burden or higher risk of an adjustment through higher inflation, both of which with negative impacts to the economic recovery. Maintaining the cap will sanction the reduction of the neutral interest rate, decreasing the fiscal effort required to stabilize public debt. 

• If the current spending cap format is maintained, structural stabilization of public debt will only be possible as of 2023. Thus, a change allowing expenses to grow at the same pace as the economy, for example, would require an increase in the tax burden of at least 1.0% of GDP and would significantly hinder the country's ability to recover its investment grade rating, keeping the cost of capital high.

• The greatest merit of the spending cap is its ability to make the budget constraints explicit, requiring society to set priorities in the public budget. Most importantly, the greatest demands on the budget, coming from healthcare, education, public safety and investments spending, are mostly covered by regional governments, which are not subject to the spending cap, but they currently find their budgets compromised by heavy pension and personnel outlays.

• Measures that are currently under consideration, such as the pension reform and efforts to combat social security fraud, already meet 47% of the adjustment implicit in the spending cap. If sustained over the coming years, measures proposed in the 2020 budget involving civil servants and adjustments to the minimum wage should ensure compliance with the spending cap until 2026.
 

Pedro Schneider
 

For the version with all charts and tables, please open the attached pdf file



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