Six Charts on Boosting Growth in Brazil
IMF News, July 25, 2019
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- Published: July 25, 2019
Overview and macro outlook
- Brazil’s economic recovery after the 2015−2016 recession remains sluggish; real per capita growth has fallen by 8 percent since the beginning of the recession in 2014.
- After the 2015−2016 recession, real GDP grew by only 1.1 percent in 2017 and 2018.
- Growth is expected to stay subdued at 0.8 percent in 2019.
- Approval of the pension reform—currently in Brazil’s Congress—and progress in finalizing and implementing the government’s structural reform agenda would boost GDP growth to 2.4 percent in 2020.
- While the unemployment rate did fall this year, it is still high compared to pre-crisis levels.
Public debt and fiscal sustainability
- Public debt is currently at 88 percent of GDP and is increasing, exposing Brazil to debt sustainability risks.
- Putting debt on a more sustainable path is critical for economic growth.
Pension reform
- Pension reform, which is underway and currently being discussed by Congress, is a crucial first step to bringing down debt.
- Spending on pensions and public wages accounts for a large share of total government expenditure.
- Absent reforms, pension spending is projected to increase substantially, driven by Brazil’s population aging.
- The current pension system is described as unsustainable and bad for income distribution.
- The pension reform under Congressional consideration is key to putting debt on a sustainable path.
Tax reform and investment climate
- Brazil has a complex tax system; ICMS (the Tax on Commerce and Services) is important in terms of revenue but is fraught with substantial distortions and exemptions.
- Given the relatively high tax burden, tax reform should aim at harmonizing the system and reducing costly and distortive tax exemptions while raising the same amount of revenues.
- Simplifying the tax system would also boost private investment.
- Revenue-neutral tax reform is high in the government’s priorities and could follow the pension reform.
Trade openness
- Brazil is one of the most closed economies in the world due to both tariff and non-tariff barriers.
- Opening up to more trade is essential to improve competitiveness and could give a much-needed fillip to investment.
- The recent European Union-Mercosur trade agreement and efforts to comply with the Organisation for Economic Co-operation and Development liberalization codes provide important opportunities to foster trade integration.
Infrastructure and productivity
- Brazil’s public capital stock and quality of infrastructure are lower than in peer countries because of low public investment—particularly on infrastructure—over the past two decades.
- Closing the large infrastructure gap would boost productivity.
- Reducing the infrastructure gap will require public investment funds to be spent more effectively and mobilization of private capital through concessions.
Source: Six Charts on Boosting Growth in Brazil — IMF (https://www.imf.org/en/news/articles/2019/07/25/na072519-six-charts-on-boosting-growth-in-brazil).