14/07/2009 - Brazil is resisting the global downturn better than many other countries thanks to sound policies developed over recent years and an improved balance of payments, said Angel Gurría, Secretary-General of the OECD.
Presenting the OECD’s Economic Survey of Brazil, Mr Gurría said these policies centred around inflation targeting, a floating exchange rate and prudent management of public finances.
“The global financial and economic crisis has not left Brazil unscathed,” said Mr Gurría. “As is too often the case, it is the poor who suffer the most in a downturn. The challenge for any government in the current climate is to protect the vulnerable, but not let the short-tem measures needed to stimulate activity undermine the longer-term health of the economy .”
He added: “Prudent policies have enabled Brazil to respond to the global crisis with measures that are counter-cyclical, that is, what is saved in good times can be used to support the economy in a downturn.”
The survey says the fiscal measures introduced to boost the economy during the crisis were appropriate and that there may be room for further interest rate reductions. But it advises against additional fiscal stimulus measures unless the economy weakens further.
The OECD forecasts Brazil’s economy to shrink by 0.8% this year before growing 4.0 % in 2010. In 2008 economic growth was 5.1%.
A major challenge over the longer-term will be to stem the rise in public spending, while ensuring adequate social protection, says the survey. General government spending (excluding interest payments) was nearly 32.5% of gross domestic product (GDP) in 2008. The survey recommends targeting more public spending on infrastructure investment and on ensuring greater cost-effectiveness in government programmes, including in the social area.
The survey also says a reform of Brazil’s tax system would help open up the underground economy, encourage businesses to expand and halt predatory industrial policies among the states. Current proposals under discussion include unifying the different value-added taxes (the ICMS) administered by individual states, introducing a similar, single system to replace the various federal levies on company turnover and reducing taxes and social contributions on wages.
The survey says the tax reform proposals are generally well thought out. It says the heavy tax burden on labour income is a factor driving businesses and workers – particularly the low paid - into the undeclared or underground economy. The potential gains of reform are stronger growth and improved social well-being.
Mr Gurría said undeniable progress had been achieved in reducing poverty and income inequality in Brazil, a development that owes much to the public policies of the past 15 years.
Further information is available from www.oecd.org/eco/surveys/brazil
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
How to obtain the publication