Brazil’s fiscal situation resembles an old vase: cracked, with stains and imperfections, but still standing. It needed a careful overhaul, but this week sent that vase crashing to the floor, turning cracks into splinters. The frustration that accompanies this package is not only in the content of the measures, but in the context in which they were announced and the sequence of political and fiscal errors throughout the year.
The government had a valuable opportunity to correct its course. The package promised an adjustment of R$70 billion, focusing on solving structural problems in public finances. This value, if well implemented, could alleviate pressure on the market, improve the country’s risk perception and breathe new life into the fiscal framework. However, implementation was marked by delays, inconsistencies and, mainly, by the inclusion of an element that compromised much of the potential of the measures: the proposed reform of Income Tax for individuals, which tends to neutralize a large part of the possible gains. taxes.
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If the same package had been presented in October or early November, without postponements and without the tax reform proposal attached, the market reaction would have been completely different. However, successive postponements eroded confidence, put pressure on the exchange rate and widened the opening of the interest rate curve, further damaging the real economy. When the announcement finally came, the government sent a message of fragility and improvisation, and the market soon realized that the estimated fiscal impact was overestimated, with a frustration of at least R$20 billion in relation to the announced value.
Furthermore, the introduction of the possible further weakens the intended fit. This reform, instead of contributing to a better fiscal result, has the potential to reduce revenues in the medium term, canceling out part of the spending cuts and keeping the fiscal trajectory unbalanced. This combination of problems made it clear that the package, although necessary, was poorly planned and executed.
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This should have been an exceptional year for Brazilian fiscal policy. Federal revenue reached record levels, driven by new tax measures, such as fuel tax relief and taxation of digital platforms. The resilience of the economy, even under the effects of a restrictive monetary policy, also contributed, especially through the growth of the wage bill. Even exchange rate depreciation played a relevant role, as the high dollar supported tax collection on imports, even with higher prices.
This set of factors should have resulted in a significant fiscal surplus. However, the explosion of mandatory expenses reversed this promising scenario. Social security benefits, temporary social aid, extraordinary credits and increased spending on public service absorbed all the additional revenue. Furthermore, parliamentary amendments further inflated spending. Instead of a historic surplus, Brazil is on track to end the year with an estimated deficit of R$60 billion, demonstrating how the lack of control over expenses compromised a period that could have been remarkable for public finances.
The biggest disappointment with the fiscal package lies in the fact that it does not address the structural problems of public accounts in a meaningful way. The uncontrolled expansion of mandatory expenditure remains the main driver of fiscal imbalance. Without profound reforms in areas such as pensions, civil service payrolls, social benefits and parliamentary transfers, any adjustment will only be superficial.
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Furthermore, the government does not appear to fully understand the impact of this lack of fiscal credibility on the country’s financing costs. Currently, Brazil pays real inflation rates plus 6.8% per year in long-term public bonds, an unthinkable reality for countries considered good payers. This lack of fiscal discipline is one of the main factors that keep these costs high, draining resources that could be used for more productive social and economic investments.
To regain market confidence and establish a sustainable trajectory for public accounts, a real commitment to significant fiscal adjustments would be essential. The economy needs an ambitious effort to reduce the deficit, combined with structural reforms that tackle the root causes of the uncontrolled growth in mandatory spending. Furthermore, it is imperative to avoid promises of tax waivers that contradict the austerity discourse, such as the Income Tax reform proposal presented together with the package.
The Brazilian fiscal scenario continues to deteriorate, and the announced adjustment package did not bring the expected redemption. The government missed a crucial opportunity to regain its credibility, alleviate pressure on the interest curve and create conditions for more balanced and sustainable economic growth. If public finances are not treated with the seriousness they require, Brazil will be increasingly close to a severe fiscal crisis, with inevitable consequences such as higher inflation, high interest rates and a stagnant economy. This will harm not only economic growth, but also the prospects for improving the living conditions of the population, especially the most vulnerable.
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Luiz Fernando Figueiredo is president of the Board of Directors of JiveMauá
This article was co-authored by Italo Faviano, economist at Buysidebrasil
