Brazil Fiscal Policy

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Background:
Brazil acted fast to inject short-term liquidity into its financial system and medium-term fiscal stimulus to the broad economy following the collapse in confidence in the global financial system in late 2008. The government of President Luiz Inácio Lula has used a combination of personal tax breaks designed to support spending on consumer goods and automobiles, business tax breaks on construction materials, government spending hikes and support for residential house purchases. However, the cost of stimulus has been low relative to other emerging economies—around 1.5% of GDP, compared to 13% of GDP for China. The long-term challenge for Brazil’s public accounts is simplification and rationalization of its taxation system, one of the most complex of any country and a significant cost-of-doing-business burden. However, the medium-term improvement in public finances has been recognized by all the three main credit rating agencies, which have recently raised Brazil’s borrower status to investment grade.

What is fiscal consolidation?

A conscious policy effort is needed by the government to live within its means and thereby bring down the fiscal deficit and public debt. It includes, among other things, efforts to raise revenues and bring down wasteful expenditure such as subsidies . As a larger mandate, it also involves the participation by state governments in the process. But the whole initiative is planned as a long-term exercise by the government through a road map for fiscal reform rather than through a single Budget announcement. This is particularly true for a country like India where the government's expenditure is way beyond its revenues, forcing it to borrow. Brazil backs away from budget target policy pillar

(Reuters) - The Brazilian government is willing to relax its fiscal discipline to prioritize economic growth in 2013, Treasury chief Arno Augustin told Reuters, backing away from one of the country's main economic policy pillars of the last decade.

Augustin said Brazil does not need to fully meet its closely watched primary budget surplus target to keep finances in good standing, since the economy has matured.

"What's new, and has been for several years now, is that the government prioritizes the economy to determine fiscal policy," Augustin said in a interview late on Tuesday.

"In the past, it was difficult to make changes to the primary (surplus) target because there were doubts about the medium-and-long sustainability" of Brazil's indebtedness, Augustin said. "Now, that sustainability is assured."

His comments are some of the most explicit by an official to recognize that the Brazilian government is moving away from the strict fiscal management rules credited with ushering in macroeconomic stability after decades of crises.

A more flexible fiscal policy also highlights President Dilma Rousseff's efforts to remove some of the safeguards that protected the Brazilian economy from disaster over the past decade, but have also restrained growth.

Augustin, whom other officials in Brasilia say has gained considerable influence with Rousseff over the past year, went as far as to say that the government could even drop the primary surplus target in favor of an overall budget balance goal that includes debt payments. However, he stressed that no decision has been made on the matter.

The primary surplus, or revenues minus expenditures excluding debt payments, is a gauge of a country's ability to repay its obligations, and is watched by investors.

The government missed its 2012 primary surplus goal of 139.8 billion reais ($68.64 billion) by a long shot after a slowdown in tax revenues. Officials tapped into the government's sovereign wealth fund and brought forward dividend payments from state-run companies to meet an already reduced primary goal.

Some analysts have criticized the government for using what they describe as "creative" accounting methods that undermine the...
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