Economic surveys and country surveillance

Economic survey of Brazil 2006: Consolidating macroeconomic adjustment


Contents | Executive summary | How to obtain this publication |  Additional information

The following OECD assessment and recommendations summarise Chapter 2 of the Economic survey of Brazil 2006, published on 24 November 2006.


Macroeconomic management has been sound, but fiscal challenges remain

Fiscal performance remains strong. The consolidated primary budget surplus target – which has been raised repeatedly since 1999 to ensure the sustainability of the public debt dynamics – continues to be met and sometimes exceeded by wide margins. The net public debt has fallen in relation to GDP since the 2003 peak and has now stabilised, albeit at the comparatively high level of around 50% of GDP by emerging market standards. The government has been able to sustain fiscal adjustment, despite the limited room for manoeuvre caused by a ratcheting up of current spending over the years and Brazil’s notorious budget rigidities. Nevertheless, fiscal adjustment has been achieved at the expense of cutting back on public investment and by increasing the tax burden. The revenue-to-GDP ratio rose by about 5 percentage points during 2000-05 to nearly 37.5% in 2005 – a level that is one of the highest among countries with comparable income levels. A durable reduction in public indebtedness on the back of a retrenchment of current expenditure, rather than tax hikes, would serve to facilitate a swifter fall in real interest rates and to permit the channelling of domestic saving to finance growth enhancing investment. It would also lay the groundwork for removing distortions in the tax system, including by broadening tax bases.

The fiscal stance remains counter-cyclical, despite fiscal consolidation

                     Source: de Mello and Moccero (2006).

Further pension reform will be essential to arrest the rise in current expenditure

Despite the reforms implemented since 1998, the deficit of the social-security regime for private-sector workers continues to rise. The main culprit is the increase in spending on pensions. This is due not only to an increase in the number of beneficiaries, which is related to the ageing of the population, but especially to the increase in the minimum wage in real terms, to which the value of most social-security benefits are linked. At the same time, widespread informality in the labour market has prevented a faster increase in the number of contributors. Moreover, average earnings have not risen in tandem with the minimum wage, driving a wedge between the system’s revenue and expenditure growth. Policy initiatives have focused on encouraging the development of complementary private pension schemes, and more recently on improving the administration of social security, especially in the area of disability and sickness benefits, which have surged recently. Responsibility for collecting contributions is now being transferred from the Ministry of Social Security to the Federal Revenue Service. The resulting strengthening of administrative controls certainly helps but does not tackle the root causes of the financial imbalance of the social security system. Further reform of the regime for private-sector workers, whose pensions account for about one-third of federal primary expenditure, will therefore be unavoidable in the coming years and should be complemented by efforts to curb labour informality so as to broaden the contribution base.

The main elements of necessary pension reform are well known

The main elements of reform for the regime for private-sector workers are threefold. First, the link between the minimum pension and the minimum wage should be severed, while maintaining the purchasing power of the minimum pension, possibly through its indexation to a price index that best reflects the consumption basket of pensioners. Second, a minimum retirement age should be introduced for both men and women under the length-of-contribution modality. Third, the minimum period of contribution for old-age pensions should be raised gradually from the current 15 years. With regard to the social security regime for public sector workers, initiatives should focus on creating complementary pension funds for civil servants, preferably of the defined-contribution type, and on standardising entitlements between the private- and public-sector regimes. Further policy action in this area is important, because outlays on pensions to retired civil servants are accounting for an increasing share of spending at the sub-national level of government. At the same time, many provisions of the 2003 reform are in any case yet to be legislated.

A cap on expenditure growth is needed to stem the rise in current expenditure

The authorities are well aware of the need to contain the rise in current expenditure. They are taking steps to address this challenge within the confines of the fiscal rule, enshrined in the Fiscal Responsibility Law of 2000, which is working well. Recent initiatives in this area include the introduction of an expenditure cap in the Budget Guidelines Law (LDO) for 2006-08, which would best be maintained in the LDO for 2007-09 and in the 2007 budget law. This policy initiative is laudable. However, there are options for improvement. Instead of being set in relation to GDP, the expenditure cap could be re-defined in nominal terms because inflation is now well anchored around the target. Also, the need to alleviate expenditure rigidity should not be underestimated, as budgetary flexibility is an important pre-requisite for successful expenditure containment. The gradual dismantling of extant revenue-earmarking requirements and the phasing-out of aggregate spending floors should be key policy objectives in this area. Greater flexibility in expenditure management would allow for the reprioritisation of budgetary allocation in favour of more cost-effective programmes, such as those focused on improving human and physical capital accumulation.

The focus should eventually shift to the headline budget balance as a benchmark for assessing fiscal performance

The fiscal rule focuses on the primary budget surplus as the key benchmark for assessing fiscal outcomes. This is because the headline budget balance has traditionally been volatile as a result of the composition of Brazil’s public debt, characterised by a predominance of securities paying floating interest rates. Under these circumstances, a case can be made for assessing fiscal performance on the basis of a budgetary aggregate that is not affected by short-term changes in monetary stance. However, little attention has been devoted to the consolidated headline deficit, which remains high, at 3% of GDP on average in 2004-05, despite the ongoing fiscal adjustment efforts. The option of targeting the headline budget balance should therefore be considered, because the composition of the traded domestic debt stock has been improved by eliminating the associated exchange-rate risk and raising the share of fixed-rate and inflation-indexed securities. Targeting the headline budget balance would have the advantage of highlighting the need for further fiscal action, even when fiscal performance measured by the primary budget surplus has been strong. However, it should be recognised that a change in the target would need to be communicated clearly and transparently to the public to avoid any loss of confidence in the fiscal regime.

Public debt management has been exemplary

The authorities have been working towards reducing the public sector’s exposure to exchange rate risk and have seized the opportunity of favourable global financial conditions to retire external debt. The Treasury began to issue long-dated real-denominated bonds abroad in 2005 and has considerably reduced external public indebtedness. International reserve holdings now exceed the government’s stock of liabilities denominated in foreign currency or indexed to the exchange rate. This achievement has been instrumental in alleviating debt refinancing risk and trimming rollover costs. Nevertheless, securities paying floating interest rates continue to account for the lion’s share of the domestic debt stock. Therefore, public-debt management should focus on consolidating the achievements to date and on stepping up efforts to reduce further the share of floating-rate securities in the traded debt stock. Attainment of investment grade for Brazil’s sovereign debt placements and the resulting lower borrowing costs will be the ultimate reward for steadfast policy action in this area.

The monetary policy regime is working well, but liberalisation of directed credit and reserve requirements would be welcome

The perception that the authorities are committed to a monetary policy framework combining inflation targeting and a flexible exchange-rate regime appears to be suitably well entrenched. The central bank enjoys de facto, but not yet de jure, operational autonomy. The policy regime has been working well, delivering continuous disinflation since 2003 and anchoring expectations. Notwithstanding these achievements, which should not be underestimated, the conduct of monetary policy is complicated by cumbersome regulations on the allocation of credit to selected sectors, especially agriculture and housing, including through mandated saving arrangements. Compulsory reserve requirements on commercial banks are also burdensome for a variety of deposit categories, although most countries that have adopted inflation targeting as the framework for monetary policymaking have now reduced or eliminated such requirements. These restrictions act as an implicit tax on the financial sector, against the backdrop of an already relatively high tax burden on financial transactions, including that of the bank debit tax (CPMF). Consideration should be given to gradually removing the extant directed credit and reducing compulsory reserve requirements so as to improve the efficiency of the financial sector and adequately reward long-term saving, an aspect of the problem that is often overlooked. The favourable domestic macroeconomic environment, with falling inflation and improving growth prospects, appears propitious for further liberalisation in this area. At the same time, the consolidation of macroeconomic stability not only creates a need to move forward but also provides an opportunity to go beyond the current policy achievements as a means of eliminating the remaining distortions inherited from the pre-stabilisation period. The payoff from reform in this area can be considerable in terms of reducing Brazil’s stubbornly high real rates of interest, which weigh heavily on growth.

Monetary policy is delivering price stability

                Source: Central Bank of Brazil and OECD calculations.

Read also ECO Working Paper 531 Consolidating macroeconomic adjustment in Brazil

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.

The complete edition of the Economic survey of Brazil  2006 is available from:


Additional information                                                                                                  


For further information please contact the Brazil Desk at the OECD Economics Department at The OECD Secretariat's report was prepared by Luiz De Mello and Diego Moccero under the supervision of Peter Jarrett.


Related Documents


Monetary policy and inflation expectations in Latin America: Long run effects and volatility spillovers

The rates and revenue of bank transaction taxes

Brazil's fiscal stance during 1995-2005: The effect of indebtedness on fiscal policy over the business cycle

Estimating a fiscal reaction function: the case of debt sustainability in Brazil

Challenges to Fiscal Adjustment in Latin America: The Cases of Argentina, Brazil, Chile and Mexico

Economic Survey of Brazil 2005


Countries list

  • Afghanistan
  • Albania
  • Algeria
  • Andorra
  • Angola
  • Anguilla
  • Antigua and Barbuda
  • Argentina
  • Armenia
  • Aruba
  • Australia
  • Austria
  • Azerbaijan
  • Bahamas
  • Bahrain
  • Bangladesh
  • Barbados
  • Belarus
  • Belgium
  • Belize
  • Benin
  • Bermuda
  • Bhutan
  • Bolivia
  • Bosnia and Herzegovina
  • Botswana
  • Brazil
  • Brunei Darussalam
  • Bulgaria
  • Burkina Faso
  • Burundi
  • Cambodia
  • Cameroon
  • Canada
  • Cape Verde
  • Cayman Islands
  • Central African Republic
  • Chad
  • Chile
  • China (People’s Republic of)
  • Chinese Taipei
  • Colombia
  • Comoros
  • Congo
  • Cook Islands
  • Costa Rica
  • Croatia
  • Cuba
  • Cyprus
  • Czech Republic
  • Côte d'Ivoire
  • Democratic People's Republic of Korea
  • Democratic Republic of the Congo
  • Denmark
  • Djibouti
  • Dominica
  • Dominican Republic
  • Ecuador
  • Egypt
  • El Salvador
  • Equatorial Guinea
  • Eritrea
  • Estonia
  • Ethiopia
  • European Union
  • Faeroe Islands
  • Fiji
  • Finland
  • Former Yugoslav Republic of Macedonia (FYROM)
  • France
  • French Guiana
  • Gabon
  • Gambia
  • Georgia
  • Germany
  • Ghana
  • Gibraltar
  • Greece
  • Greenland
  • Grenada
  • Guatemala
  • Guernsey
  • Guinea
  • Guinea-Bissau
  • Guyana
  • Haiti
  • Honduras
  • Hong Kong, China
  • Hungary
  • Iceland
  • India
  • Indonesia
  • Iraq
  • Ireland
  • Islamic Republic of Iran
  • Isle of Man
  • Israel
  • Italy
  • Jamaica
  • Japan
  • Jersey
  • Jordan
  • Kazakhstan
  • Kenya
  • Kiribati
  • Korea
  • Kuwait
  • Kyrgyzstan
  • Lao People's Democratic Republic
  • Latvia
  • Lebanon
  • Lesotho
  • Liberia
  • Libya
  • Liechtenstein
  • Lithuania
  • Luxembourg
  • Macao (China)
  • Madagascar
  • Malawi
  • Malaysia
  • Maldives
  • Mali
  • Malta
  • Marshall Islands
  • Mauritania
  • Mauritius
  • Mayotte
  • Mexico
  • Micronesia (Federated States of)
  • Moldova
  • Monaco
  • Mongolia
  • Montenegro
  • Montserrat
  • Morocco
  • Mozambique
  • Myanmar
  • Namibia
  • Nauru
  • Nepal
  • Netherlands
  • Netherlands Antilles
  • New Zealand
  • Nicaragua
  • Niger
  • Nigeria
  • Niue
  • Norway
  • Oman
  • Pakistan
  • Palau
  • Palestinian Administered Areas
  • Panama
  • Papua New Guinea
  • Paraguay
  • Peru
  • Philippines
  • Poland
  • Portugal
  • Puerto Rico
  • Qatar
  • Romania
  • Russian Federation
  • Rwanda
  • Saint Helena
  • Saint Kitts and Nevis
  • Saint Lucia
  • Saint Vincent and the Grenadines
  • Samoa
  • San Marino
  • Sao Tome and Principe
  • Saudi Arabia
  • Senegal
  • Serbia
  • Serbia and Montenegro (pre-June 2006)
  • Seychelles
  • Sierra Leone
  • Singapore
  • Slovak Republic
  • Slovenia
  • Solomon Islands
  • Somalia
  • South Africa
  • South Sudan
  • Spain
  • Sri Lanka
  • Sudan
  • Suriname
  • Swaziland
  • Sweden
  • Switzerland
  • Syrian Arab Republic
  • Tajikistan
  • Tanzania
  • Thailand
  • Timor-Leste
  • Togo
  • Tokelau
  • Tonga
  • Trinidad and Tobago
  • Tunisia
  • Turkey
  • Turkmenistan
  • Turks and Caicos Islands
  • Tuvalu
  • Uganda
  • Ukraine
  • United Arab Emirates
  • United Kingdom
  • United States
  • United States Virgin Islands
  • Uruguay
  • Uzbekistan
  • Vanuatu
  • Venezuela
  • Vietnam
  • Virgin Islands (UK)
  • Wallis and Futuna Islands
  • Western Sahara
  • Yemen
  • Zambia
  • Zimbabwe
  • Topics list