Even with a tax and framework, OECD sees Brazilian debt on the rise and suggests new reforms

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The entity released an economic report on Brazil this Monday. OECD recommended that the country limit spending on health and education. And not granting a real increase in pensions. Minister of Finance, Fernando Haddad, in image from December 2023 Diogo Zacarias/Ministry of Finance The Organization for Economic Cooperation and Development (OECD) assessed this Monday (18) that Brazilian public debt will continue to grow in the coming years, and could reach 90% of the Gross Domestic Product (GDP) in 2047. For the entity, the increase in Brazil’s debt will continue even with the approval this year of the new rule for public accounts – the fiscal framework – and the tax reform on consumption . The estimate is contained in the economic report on Brazil from the OECD – a group made up mainly of more developed nations. To address the situation, the entity recommends new reforms. “A more ambitious package of structural reforms would boost potential growth and lead to a decline in the debt/GDP ratio,” the OECD added in the report. The rebalancing of public accounts, sought by the current economic team through the fiscal framework, is considered important by the financial market to avoid a spike in Brazilian debt. The approval of the tax reform is also seen as an important factor in debt control, as there is expectation of a strong impact on Brazilian GDP growth – which mitigates the expansion of Brazilian debt In October this year, consolidated public sector debt totaled 74.7% of GDP, around R$ 7.9 trillion (understand the relationship between debt and interest rate here). In comparison with the end of last year, when the debt was R$7.22 trillion, or 72.9% of GDP (updated data), however, there was an increase of 1.8 percentage points. Brazil joined in 2017, during the government of President Michel Temer, with a formal request to join the OECD, which was maintained under the governments of President Jair Bolsonaro and, more recently, Luiz Inácio Lula da Silva. Additional reforms According to the OECD, an ambitious package of reforms could stimulate the economy in the coming years and, if implemented, reduce the growth rate of Brazilian public debt which, even so, would reach 80% of GDP in 2047. Among the reforms proposed are: Reduction of barriers to entrepreneurship and competition by reducing, for example, administrative burdens and simplifying licensing requirements Greater trade openness, through the reduction of tariffs, which would allow for stronger global integration Measures to strengthen the governance of institutions and reduce corruption Permanently increase public investment by 2 percentage points of GDP Rules for public accounts According to the OECD, strengthening rules for public accounts will be fundamental for debt sustainability and investor confidence. The entity’s recommendation is that Brazil change the format of the current spending floors in health and education, which are linked to revenue growth – something that the Lula government’s economic team has already indicated it will seek to do for the year 2025. The proposal of the OECD is that these expenses should be adjusted for inflation. As a result, spending on health and education would grow less in the coming years. “While ensuring sufficient financing for health, education and social security is understandable from a social policy perspective, this limits the flexibility of fiscal policy [das contas públicas] to cope with demographic changes or adjust to adverse economic shocks”, says the OECD. The entity also recommended that Brazil “rethink” some automatic indexations of spending rules, which would allow greater flexibility to adjust policies to new priorities. The OECD recommendation is that social benefits, such as pensions, be linked to inflation, and no longer to the minimum wage – which, according to the new approved format, will rise more than price changes. “The minimum value of social security benefits, which The overwhelming majority of pension recipients receive are indexed to the minimum wage, leading to minimum wage increases with considerable tax implications. Indexation has led to a considerable increase in mandatory expenditure and a reduction in fiscal space”, assessed the OECD. The entity also assessed that there is room to consolidate several social protection programs to reduce duplication of benefits and save resources that could be redirected to protect the most vulnerable. And he considered that new Social Security reforms may be necessary to stabilize pension expenses in the coming years and contain the increase in the deficit. At the same time, he also reported that an administrative reform could generate a spending reduction of up to 8 % of GDP in ten years. All these recommendations had already been made by private sector analysts, who assess that the government’s economic team has failed by not giving the same weight to spending cuts as it has given to the elaboration of measures to increase The organization also judged that it is essential to keep inflation expectations “anchored” with the targets defined by the government to preserve the credibility of the currency. And he recommended limiting demand pressures, that is, public spending. For the OECD, increasing policy credibility for public accounts in the long term would support monetary policy (interest rate setting by the Central Bank) in controlling inflation and allow for a more aggressive reduction in the basic interest rate – currently at 11.75 % per year. The Secretary of Economic Policy of the Ministry of Finance, Guilherme Mello, stated that the fiscal framework, by limiting expenses, seeks to stabilize public debt in the future. “The discussion is about the speed of the process,” he declared. He added that the government is paying attention to the spending reduction agenda, in addition to tax benefits, to stimulate economic growth and the reduction of interest rates by the BC. “Reducing interest rates is the most decisive element, along with economic growth, for reducing debt,” he concluded. Public debt rises 2.9% in June and reaches R$6.19 trillion, reports National Treasury Understand the relationship between debt and interest rate The relationship between debt and GDP is a relevant indicator for the financial market, interpreted as a a sign of the country’s ability to honor its short, medium and long-term financial commitments. The higher the debt in relation to GDP, the greater the risk of default in times of crisis. Projections for public debt in the future, along with other indicators such as the country’s growth rate and the results of public accounts, are used by the market to set the interest rate in the futures market, which serves as a reference for what the government paid in public bond issues – the so-called “rollover” of the debt. If there is a perception that debt will be greater, as well as the risk in public accounts, the market usually reacts by charging a higher interest rate. And this drives up the country’s debt, and also has an impact on the rates charged by banks to individuals and companies.

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