Brazil is reaping the benefits of macroeconomic consolidation, underpinned by a prudent policy stance. Much progress has been made in fiscal consolidation and monetary policy continues to be conducted in a forward-looking manner. The external adjustment has been remarkable, with continued strong export performance, making the economy more resilient to changes in market sentiment. These achievements owe much to the strengthening of institutions, in particular the inflation targeting framework and the Fiscal Responsibility legislation. The economic recovery is now firmly established. But the consolidation of macroeconomic stability remains essential moving forward, coupled with further structural reform, to ensure that the positive outlook ushers in a virtuous circle of improved confidence and resilient, equitable growth.
Improving the quality of fiscal consolidation
The government's record in meeting the budget targets, even in adverse conditions, is commendable. Public debt management has also been strengthened. But fiscal adjustment has been achieved primarily by hiking revenue and compressing public investment. Widespread revenue earmarking and the introduction of minimum expenditure levels over the years, often through constitutional provisions, have curtailed budget flexibility.
A comprehensive assessment of existing revenue earmarking and mandated spending requirements against the achievement of their intended policy objectives could make for more cost-effective spending. The need for continued fiscal consolidation can therefore be reconciled with that of alleviating Brazil's high tax burden, better channelling budgetary resources to meet society's economic and social priorities.
Enhancing the investment climate
Private investment is recovering but the current level of investment, particularly in infrastructure, is insufficient to sustain robust growth over the medium term. There is limited room in the budget to boost public capital spending at the current juncture and private investment is discouraged by a scarcity of credit, high intermediation costs, and regulatory uncertainty in several sectors.
Enhancing the investment climate is therefore crucial to improving the economy's growth performance. New bankruptcy legislation, once approved, is expected to ease constraints on loan recovery, encouraging credit and reducing intermediation costs. The overall approach to regulatory reform in network industries, particularly electricity, is well thought out but the risk of regulatory failure should not be underestimated. Public-private partnerships can encourage investment if carried out in a fiscally sound manner, adequately balancing risks between the government and its private-sector partners.
Strengthening social policies
Much has been done in the social area over the last decade or so, with unquestionable improvements in key social indicators, particularly in education. The government already spends a high proportion of GDP on social programmes. Public spending on pensions accounts for a higher share of GDP in Brazil than in the average OECD country, despite Brazil's younger population. But spending on means-tested programmes, such as income transfers for the care of children, and elderly and disabled persons, amounts to a relatively small share of public social spending, well below the OECD average.
Social policies will need to be strengthened in pursuit of the government's social agenda, prioritising the social programmes that are deemed to be most cost-effective and conducive to the accumulation of human capital, while maintaining fiscal discipline and galvanising social support for reform. The continued development of Brazil's contributory social insurance should aim to give it a stronger pro-poor profile in the long term.
By: N. Peter Kramer
