Brazil makes a move on fiscal policy

Escrito el 11 febrero 2011 por GONZALO PABLO GARLAND en América Latina

The Great Recession of 2008 and 2009 had a significant impact on Brazil, despite a potential «decoupling» from what was happening in the developed world, as the economic debate argued around that time. In fact, in the BRIC group many would say that there was only a certain degree of decoupling in the cases of China and India, whose economies slowed down but continued to grow at rates above  9 and 5% respectively.

Brazil’s economy stalled, however, and decreased a couple of decimal points, while Russia’s decreased almost 8%. Because of this crisis, Brazil applied an expansionary fiscal policy, as did so many countries in the world, increasing expenditures and extending tax benefits. 2010 turned out to be a much better year, with a strong recovery in production -higher than 7%. But for both local and global reasons, inflation has started to increase again.

December showed an annual inflation in Brazil of 5.9%, and in January of this year alone, the monthly inflation was 0.83%. These inflation rates are the highest in close to 6 years. Considering the combination of higher growth and inflation, it should not surprise us, therefore, that Brazil has just announced a change in fiscal policy, with a reduction of close to 22 billion euros on fiscal expenditures. This adjustment, however, will not impact the social programs nor the infrastructure investments that are necessary to prepare the country for the 2014 Soccer World Cup and the 2016 Olympic Games. But apart from these exceptions, the reduction will affect all sectors of the public administration and includes orders to freeze any purchases of real estate, automobiles, and several other current expenditures. The main macroeconomic objectives, then, are to control inflation and reduce the pressure on the very high interest rates of the country, even if growth may fall somewhat in relation to 2010. Given the macreoeconomic outlook, this move seems intended to reestablish a more healthy balance between growth, inflation and interest rates, thus also reducing the pressure of a further appreciation of the real. At the same time it maintains the expenses that are necessary both for social purposes and for the commitment to the key global events that will soon be taking place in the country.


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