Fiscal adjustment focused on revenue is worse for the economy, says analyst

Fiscal adjustment focused on revenue is worse for the economy, says analyst

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Finance Minister Fernando Haddad: fiscal adjustment focused on revenue and without spending cuts leads to worse results for the economy, says analyst.| Photo: Isaac Fontana/EFE

The Lula government’s decision to make a fiscal adjustment based solely on increasing revenue and without cutting spending is a mistake, says Gabriel Barros, partner and chief economist at Ryo Asset.

According to Barros, international academic literature shows that countries that made revenue adjustments had worse macroeconomic results than economies that combined revenue adjustment measures and expense cuts.

He cites a study published in Journal of Economics Perspectivesentitled “Effects of Austerity: Expenditure and Tax-Based Approaches”, which shows the undesirable consequences of the single revenue strategy on inflation, interest rates and GDP growth.

“Revenue is not completely predictable, which creates uncertainty and alters future market expectations”, explains the economist.

For Barros, there will only be more precise estimates from December, when new tax projects to increase revenue have already been approved by Congress.

At this time, the external scenario and the prospects for an American recession will also be defined, which could affect world markets. “If reality shows the impossibility of meeting the target, some concrete measure will have to be taken in relation to cost containment”, predicts the economist.

For economic consultant Zeina Latif, it is difficult to establish a deadline for reviewing the target. She believes that depending on numerous factors, domestic and external, the bill could be left for the next government. “For now, the possibility of cutting spending is more rhetorical. This government will only make the adjustment if forced by circumstances”, she believes.

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