Brazil’s New Fiscal Framework: How Credible Is Fiscal Rule?

Policy credibility is crucial to successful outcomes in almost all areas, from imposing speed limits to avoiding settlements in flood areas. If people do not believe authorities will follow through on policy promises, they will act as if there is no policy, rendering policy ineffective. This is poignantly true with fiscal policy and the implications for monetary policy. If investors and citizens question the government’s ability to spend within a reasonable distance of sustainable increases in debt, they will expect that investors buy less debt, putting upward pressure on interest rates, and sometimes forcing the government to lean on the Central Bank to monetize debt.  The outcome entails high interest rates, accelerating inflation, and slow growth – and Brazil’s history is replete with experiences like these.

Consequently, successive governments have created rules that circumscribe both fiscal and monetary policies, similar to Odysseus strapping himself to the mast of his ship so the Sirens’ song could not seduce him to run the ship aground. Brazil currently has one monetary rule and three fiscal rules. The monetary rule is Inflation Targeting where the Central Bank of Brazil follows a single inflation target with some allowance for unavoidable deviations due to unexpected events. Brazil’s current fiscal rules include: 1) the Fiscal Responsibility Law, 2) the Golden Rule, and 3) the Spending Cap. The Spending Cap – allowing no increase in inflation-adjusted federal government expenditures – is the most effective and credible of the fiscal rules. The Fiscal Responsibility Law did not prevent violations, but did prove credible after the fact by causing various impeachments of executive politicians, including the president. The new Lula administration has proposed to substitute the Spending Cap with the New Fiscal Framework, currently making its way through Congress.

The Chamber brought together a group of experts on Brazilian fiscal law and policy to describe the new and complicated guidelines and evaluate the efficacy of the framework in terms of limiting fiscal deficits; the growth in government debt relative to the size of the economy; and the effects on financial markets, inflation, and growth. Please watch the highlight video of this timely and informative program.

Opening Remarks:

Paulo Vieira da Cunha, Partner, VERBANK Consulting, LLC

Moderator:

John H. Welch, CEO & Founder, Research for Emerging Markets (REM, Inc.); Professor of Economics, Universidade Presbiteriana Mackenzie 

Speakers:

Mansueto Almeida, Chief Economist, BTG Pactual

Murillo de Aragão, Political Scientist, Constitutional Lawyer, and Founder of Arko Advice 

Marcos Mendes, Economist and Research Associate, Insper (view PRESENTATION)

Vilma Pinto, Director, Independent Fiscal Institution (IFI) Federal Senate of Brazil

View Speaker Bios

Registration information:

Members: Free
Non-Members: $15

Format: Zoom Webinar