Brazil needs to adjust from R$200 billion to R$300 billion to stabilize debt, says Nelson Barbosa – 03/20/2023 – Market

Brazil needs to make a fiscal adjustment of R$ 200 billion to R$ 300 billion to stabilize the trajectory of the public debt, said this Monday (20) economist Nelson Barbosa, director of BNDES (National Bank for Economic and Social Development) and former Minister of Finance and Planning.

The exact size of the effort, however, will depend on interest rates and economic growth conditions. The lower the cost of debt and the greater the increase in GDP (Gross Domestic Product), the less expressive is the size of the adjustment.

Even so, Barbosa pointed out that it is difficult to accommodate such an expressive adjustment in a short time. “It will take at least four years,” he said.

The estimates were presented during a seminar promoted by the BNDES on sustainable development, at a time that coincides with the discussion of the final details of the proposed new fiscal rule to be presented by the Ministry of Finance.

Barbosa pointed out that the government has different paths to achieve such a fiscal effort, such as cutting expenses or raising tax collections, but this must be a political decision.

“Strategies that tried to make the entire adjustment by cutting expenses, cutting the entire floor of society, go wrong. Strategies that try to make the adjustment by taxing only a part of the population, also fail”, stated Barbosa.

“Our challenge, as a generation, is to try to understand how to distribute this. And how to distribute it in time. If you try to do it too fast, it also goes wrong and the result doesn’t come. In 2015 it didn’t come, 2017 didn’t come either”, he said.

In the simulations, the former minister used the DLGG (general government net debt) as a reference, which includes the federal government, states and municipalities. Unlike other better-known indicators (such as gross debt), the DLGG excludes state-owned debt and government bonds used by the Central Bank to make its interest rate policy.

According to Barbosa, to stabilize the DLGG at the level of 56.4% of GDP (Gross Domestic Product) observed at the end of 2022, it is necessary to reach a surplus (collection greater than expenses) between 1% and 2% of GDP. The projection considers a real interest rate between 4% and 5% and economic growth between 1.5% and 2.5%.

As the country should have a deficit equivalent to 1% of GDP this year, this brings the adjustment closer to 2% to 3% – equivalent to R$ 200 billion to R$ 300 billion.

“Whatever the rule, I think an important principle is to decriminalize fiscal policy. Less judicialization, more negotiation, more common sense,” he said. “In monetary policy, when the Central Bank does not meet the target, there is an explanation, including the necessary measures to bring inflation to the target within the period that the BC considers necessary. This same principle should also work with fiscal policy.”

In the same panel of debates, the Secretary of Economic Policy of the Ministry of Finance, Guilherme Mello, said that he could not anticipate details of the rule drawn up by the folder. However, he stated that the proposal will guarantee “over time” the recovery of fiscal sustainability, “measured by a series of indices” such as the primary surplus and debt.

The secretary also downplayed the “alleged conflict” between the economic and political wings of the government. “Obviously there may be occasional disagreements, but the objective is the same as that of all members of the government,” he said.

As shown to Sheetthe debate on the new rule for controlling public accounts, led so far by Minister Fernando Haddad (Finance), takes place amidst a climate of distrust in the core of the government.

According to allies, Haddad restricted the discussion to a small group to prevent the proposal from leaking and arriving transfigured at the hands of President Luiz Inácio Lula da Silva (PT). The design was only detailed to the Chief Executive this Friday (17).

Afraid of possible criticism from PT members, the head of the economic area sought first and foremost to win the boss’s endorsement, thus avoiding requests for changes – keeping the design as far away as possible from the eyes of the political wing. Such caution, however, generated discomfort in other areas of the government.