Brazil's fiscal framework struggles to ensure economic sustainability
- Brazil's public debt has increased significantly over the last decade, now approaching 80 percent of GDP.
- President Lula's framework aims for a primary surplus by 2026 but is hindered by past modifications and political challenges.
- The situation in Brazil reflects potential warnings for global economies, including the U.S., vulnerable to similar fiscal challenges.
Brazil has faced significant economic challenges, particularly with its rising public debt, which has increased from just over 50 percent of GDP to nearly 80 percent since the previous decade. The administrations of Dilma Rousseff and Michel Temer contributed to this escalation, prompting the need for fiscal reform. In August 2023, President Luiz Inácio Lula da Silva implemented a new fiscal framework intended to transition the country from a primary budget deficit to a primary surplus by 2026, with spending limits aimed at maintaining fiscal discipline for the next decade. However, these plans faced disruptions and modifications during Jair Bolsonaro’s presidency, undermining their effectiveness. As market confidence wanes in response to these fiscal policy shifts, various indicators point to rising inflation expectations and interest rates. Brazil's current situation reflects a broader trend that could serve as a cautionary example to other nations, including the United States, where similar vulnerabilities exist due to high debt levels. Economists note that without effective fiscal consolidation, countries may enter a vicious circle of escalating debt-service costs and declining fiscal sustainability.