The Challenge of Fiscal Sustainability in Brazil

Abstract

Brazil illustrates the point that despite low interest rates across the world, there are limits to debt and deficits in the post-COVID world. The country’s local currency debt composition is a luxury few emerging markets enjoy, but the debt stock is comparatively very large, and much of it comes due in the relatively short term, resulting in high annual gross financing needs and high rollover risk. Brazil took important strides towards fiscal sustainability with the 2016 expenditure ceiling, the 2019 pension reform and the 2021 constitutional amendments, but the country’s unusually steep yield curve reflects that in the medium term, significant fiscal policy risks remain.

For an emerging market, Brazil’s share of tax revenue in GDP is already quite high so there is limited room to use taxation alone to address the emerging fiscal risks. Expenditure cuts face obvious political difficulties, especially given the country’s level of inequality. Regardless of the path that Brazilian democracy chooses, two things are certain: action is needed, and Brazil would no doubt benefit from greater fiscal certainty and stability at this point in its history.