IMF ‘strongly supports’ Brazil’s new fiscal rules

Following its annual Article IV visit to Brazil, the International Monetary Fund (IMF) staff issued on Tuesday evening a statement saying it “strongly supports” the government’s commitment to improving Brazil’s fiscal position and achieving a primary fiscal surplus of 1 percent of GDP by 2026. 

However, the statement signed by the leader of the IMF mission to the country, Ana Corbacho, also recommended a “more ambitious fiscal effort that continues beyond 2026 to put debt on a firmly declining path, while protecting social and investment spending,” stressing that this can be supported by the new fiscal framework, and also by the “further broadening of the tax base,” as a reference to the Luiz Inácio Lula da Silva administration’s proposal of reforming consumption taxes. 

The IMF staff said the reform could “significantly streamline the tax regime and could boost potential output.”

The government’s proposal for a new fiscal framework could be voted on in the next few weeks. The bill’s rapporteur, congressman Cláudio Cajado, presented his final draft to party leaders on Monday, including slightly stricter provisions than the Finance Ministry’s original proposal, and Finance Minister Fernando Haddad will speak this Wednesday in a public hearing aimed at convincing the House to vote on a motion to fast-track the fiscal framework bill — making a floor vote possible by next week.

The framework’s final draft restricts the growth of government spending from one year to the next to 70 percent of revenue growth if primary surplus targets are met. Even in the unlikely event of a revenue boom, spending growth would be capped at 2.5 percent.

Unlike the current spending cap, which prevents the government from increasing spending beyond inflation, the new rule also gives the state leeway to make investments and fund social policies. According to the draft, if the government fails to meet its fiscal goals, spending can still grow but only at half the rate of revenue growth.

While backing the Lula administration’s proposal to prevent spending and debt from ballooning, the IMF staff also emphasized the need to “bring inflation down” as a critical factor “to protect vulnerable households, who are hurt the most by high inflation.” The fund’s stance, the team wrote, is “consistent with reducing inflation to target, in line with the inflation targeting framework” — meaning its view is very much the same as that of the Brazilian Central Bank, which has repeatedly reaffirmed the need to maintain the country’s benchmark interest rate high for as long as it takes to bring inflation down. 

An interesting recommendation, however, is in line with the government’s current economic policy, which is to bring more flexibility to Brazil’s inflation-targeting framework. “To increase clarity around flexibility when shocks hit the economy and reduce uncertainty, consideration could be given to setting a fixed medium-term target in line with regional peers. In contrast, considering targets on an annual basis is a less efficient way to gain flexibility,” the end-of-mission statement reads.

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