Brazil’s fiscal policy has been neutral or contractionary in recent years – IFI

RIO DE JANEIRO, BRAZIL – Fiscal policy in Brazil “has been neutral or contractionary in recent years,” according to a study released by the Independent Fiscal Institution (IFI) yesterday. Conducted by director Vilma Pinto and analyst Alexandre Andrade, the study is based on the concept of structural fiscal result, which eliminates from the conventional primary result the impacts of the economic cycle and non-recurring events.

According to IFI’s calculations, a fiscal policy monitoring body linked to the Senate, the structural result showed a 1.2% deficit of GDP in 2020.

“That is, by excluding the effect of the economic cycle and non-recurring events, the central government’s primary result would still be in deficit,” it said.

The agency also estimates that the economic cycle and non-recurring events last year increased the observed primary deficit by 1.5 percentage points and 7.3 percentage points of GDP, respectively.

In contrast, the fiscal impulse, which is the change in the structural result in the period, was positive by 0.1 percentage point in 2020. According to the IFI, this shows that “the fiscal policy direction is close to neutrality.”

In turn, in the year through September, there is a fiscal contraction of 0.2 percentage points of GDP.

“Therefore, the result indicates that the fiscal policy, considering the variation of the structural result, has been neutral or contractionary in recent years,” it said, noting that the “containment of salary adjustments of public servants (except military personnel) and the Social Welfare reform contribute to these results.”

The adjusted fiscal impulse, which includes structural and non-recurring results, was expansionary in 8.5 percentage points of GDP last year and contractionary in 6 percentage points in the accumulated four quarters through September this year, according to the agency’s calculations. The IFI uses adjusted fiscal impulse as a way to “measure the impact of fiscal policy on demand” in the short term.

But economists caution about the negative impact that measures such as the Court-ordered federal debt Proposed Constitutional Amendment (PEC) can have on public accounts.

“Fiscal risk has increased significantly in recent months,” the authors say. “The room to be opened in the spending cap could worsen the results, particularly if permanent expenses grow after 2022.”