Brazil Faces Economic Growth Hurdles Amid Fiscal Challenges

Brazil’s economic outlook is clouded by worsening public finances, raising questions about future growth.

Alessandra Ribeiro from Tendências Consultancy warns local media that challenges in raising revenue against rising spending may shift fiscal targets beyond 2024, heightening economic uncertainty.

Following a 2022 surplus, Brazil recorded a R$230.5 billion primary deficit in 2023, one of its largest.

Even after adjusting for specific payments, a R$117.2 billion deficit remained, due to rising expenses and falling revenues.

Tendências sees a 65% chance that tax revenue recovery efforts will fall short, complicating the fiscal adjustments planned by President Luiz Inácio Lula da Silva’s team.

However, this could limit annual economic growth to 2.4% through 2033.

Weaknesses in the ruling coalition and limited political capital for President Silva are likely to affect the legislative agenda, according to the consultancy.

This division hampers fiscal management and hinders economic policy initiatives.

The consumption tax reform, introducing a dual VAT with many exceptions, might lead to one of the world’s highest base rates at around 27.5%.

Ongoing political pressures could prevent the economic team from implementing fiscal strategies effectively.

Lula’s reluctance to cut spending, aiming to preserve political capital, may necessitate revising primary surplus goals.

“Fiscal policy skepticism could raise long-term interest rates, limited by global trends,” Tendências warns, potentially capping GDP growth.

In a pessimistic scenario, influenced by global tightening and political instability, Brazil might only achieve 1.5% annual growth until 2033.

This outlook considers the government’s political vulnerability and its impact on public account sustainability.

An Optimistic Scenario relies on broader support for Finance Minister Fernando Haddad’s revenue plan, potentially leading to a healthier 3.1% annual growth if the consumption tax reform succeeds.

International challenges for emerging markets include a slower global economy and higher interest rates.

The IMF predicts modest growth, with emerging challenges from major economies and geopolitical tensions affecting global and domestic economic landscapes.

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