The Independent Fiscal Institution (IFI) predicts that public debt will reach 84.1% of GDP in 2026. This means that the relationship between debt and the country’s wealth generation could increase by 12.4 percentage points throughout of the third term of President Luiz Inácio Lula da Silva (PT) – in December 2022, this percentage was 71.7%.
In August of this year, public debt was 78.3% of GDP, and the forecast of the IFI – a body that is formally linked to the Senate – is that it will close the year at 80%. Until June, the IFI’s projection was that the debt would reach 78% of GDP, but the institution revised this number upwards.
“Contributed to this review: (i) the recent debt trajectory; (ii) the scenario of rising interest rates; and (iii) the expectation of a slight worsening in the primary deficit of the consolidated public sector for 2024, now at 0.8% of GDP, compared to a deficit of 0.7% of GDP expected in June”, says a report published in October.
HAS People’s Gazettethe executive director of IFI, Marcus Pestana, stated that the escalation of public debt is the main symptom of deterioration and unsustainability of the country’s fiscal regime.
“The relationship between public debt and GDP is considered the main thermometer of a country’s fiscal health. This escalation of debt – which reached 51% of GDP in December 2013 and will end this year at 80%, with an upward bias of 82.2% and 84.4% in 2025 and 2026; and, if no structural reform is carried out, it will reach 90% in 2029, and 100% of GDP in 2034 – it is the main symptom of the unsustainability of our fiscal framework”, he said.
See below a graph with IFI projections for public debt in the coming years:
The International Monetary Fund (IMF) also sees an increase in public debt. For this year, the projection is that it will reach 87.6% – the discrepancy in relation to the IFI calculation is due to the methodology used by the Fund. The IMF also believes that the .
According to a Fund report published in October, “the fiscal outlook for many countries may be worse than expected for three reasons: large spending pressures, an optimistic bias in debt projections, and considerable unidentified debt.”
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High interest rates and primary deficits boost public debt growth
One of the points highlighted in the Independent Fiscal Institution’s report is that part of the debt, in fact, has been leveraged by interest expenses to roll over public debt.
In 2024, for example, public debt rose by the equivalent of 3.8 percentage points of GDP. According to the Central Bank, this increase is mainly due to the incorporation of nominal interest (+5.6 pp), and also to the net issuance of debt (+1.2 pp), exchange rate devaluation (+0.5 pp) and recognition of debt (+0.2 pp). What prevented a greater increase in the indicator was the growth in nominal GDP, with an impact of -3.6 pp on the variation in debt.
The net issuance of debt has to do with the need to cover the gap in primary accounts. “Why does a government need to issue new bonds? Because it is not producing a primary surplus, because if it had an operational primary savings, it would pay the interest with the savings formed with the difference between primary revenue and expenditure. As the government is producing primary deficits, there is no money to pay the interest. And you have to pay interest on more debt, so you issue more bonds”, he explained.
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This process, says the IFI director, is a vicious cycle: the greater the debt, the greater the premium that lenders demand. Thus, the negative balance of the primary result – which is revenue minus expenses, without taking into account interest payments – leads to an increase in interest rates that ends up generating an increase in the nominal deficit, which includes interest payments.
The government’s negative results make it difficult to reduce interest rates, as the president of the Central Bank, Roberto Campos Neto, has already highlighted. “At all times in recent Brazilian history, being able to reduce interest rates and live with lower interest rates is associated with a positive fiscal shock. There is no monetary harmony without fiscal harmony. This is important,” he stated during the event in September.
Brazil has higher public debt than other emerging countries and Latin America
Pestana, from IFI, marks the year 2014 as a watershed for the most significant increase in debt. That year, the so-called “fiscal pedals” began, the creative accounting of the government of then president Dilma Rousseff (PT).
“Creative accounting was deteriorating the fiscal scenario. Debt returned to a steep slope until the pandemic, but it was already on this growth trend before. It had already gone from 51.5% of GDP to 74.4% at the end of 2019. And this in the period in which the commodity boom had already ended and in which Brazil had already done a lot of nonsense on the fiscal front, in 2014, 2015 and 2016”, he commented.
Regarding the current level of Brazilian debt, which some say is still below the OECD average, Pestana believes that there is no comparison. According to the executive director, in Japan, for example, the debt is 210% of GDP, but the bonds mature in 40 or 50 years and the interest rates are negative.
The largest economy in the world, the United States also has greater debt than Brazil, of more than 120% of GDP. However, they issue the world’s main currency and pay much lower interest rates than us.
According to the IFI report, “the gross debt of 84.7% of GDP, according to IMF criteria, puts Brazil in line with the debt of the Euro Zone, for example, which reached 88.7% of GDP at the end of 2023. This value indicates that the country is in a vulnerable situation to shocks, according to IMF studies seen previously, which demonstrate that countries that carry out debt renegotiation had an average gross debt between 70% and 88% of GDP, at the time of restructuring”.
The document also draws attention to the lack of solid planning for reducing Brazilian public debt, contrary to what occurs in Eurozone economies, which foresee its long-term reduction to this percentage. And it highlights that, according to current rules, the debt can be moved forward and upward, with each new projection.
“Even advanced economies, which historically have more favorable macroeconomic conditions than Brazil, have a gross debt level lower than or in line with that observed in the country (with the exception of the G7 countries), in addition to having plans to gradually reduce the stock of debt, while the national framework only intends to stabilize the level of debt, a result that has not yet been achieved”, points out the report.
