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The next Economic Survey of Brazil will be prepared for 2011.
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Chapter 1 Looking beyond the global financial and economic crisis towards sustained growth
Brazil’s economic fundamentals have improved considerably in the ten years following the abandonment of exchange-rate management in 1999 and adoption of a policy framework combining inflation targeting, rules-based fiscal management and a flexible exchange rate. The economy is therefore weathering the effects of the unfolding global financial and economic crisis rather well, and an incipient recovery is getting under way. The policy responses to the crisis have been appropriate: measures were taken to enhance liquidity and prop up credit, the monetary stance began to be relaxed in January 2009, and the tax burden on selected financial transactions and activities was alleviated. The banking sector is sound, and Brazilian households and firms do not suffer from the financial imbalances that have been at the core of financial distress in other parts of the world. The largest payoff from macroeconomic consolidation over the last few years has been improved growth outcomes. The fruits of higher growth have also been fairly well distributed, contributing to falling income inequality, which has been traditionally highly skewed. But further progress will be needed in several policy areas to sustain high growth over the long term, once the deleterious effects of the global crisis have waned. In particular, initiatives to raise labour productivity and to maintain the current dynamism of private investment could have the largest payoffs in terms of raising the economy’s growth potential.
Chapter 2 Reaping the benefits of macroeconomic consolidation
Despite the current problems related to the global financial and economic crisis, ongoing macroeconomic adjustment continues to bear fruit. Attainment of the primary budget surplus targets has delivered falling public debt-to-GDP ratios since 2003. Prudent debt management has reduced refinancing risk and external vulnerabilities. The forward-looking conduct of monetary policy within a framework combining inflation targeting with a floating exchange rate has yielded reasonably low and progressively less volatile inflation, as well as anchoring inflation expectations around the pre announced targets. Credit, which had traditionally been in short supply, began to expand in earnest in 2003 on the back of favourable market conditions, monetary easing and financial innovation to improve access to bank loans among the underserved population. While there may be room for some further monetary easing during 2009-10, depending on the pace and strength of the recovery, additional counter cyclical discretionary fiscal action in response to the global crisis would be inadvisable, unless activity weakens much further, because it would put additional strain on financial markets at a time when credit is scarce for private-sector activity. A long-standing challenge remains in the fiscal area: expenditure growth will need to be contained to make room in the budget for raising pro-growth public investment and reducing the tax take over the longer term. Further financial deepening should also feature prominently in the authorities’ structural reform agenda. In this respect, a gradual elimination of compulsory bank reserve holdings, which began to be eased as part of a liquidity-enhancing package in response to the global crisis, as well as of directed credit operations, would also be advisable.
Chapter 3 Reforming indirect taxes and labour levies
The complexities and fragmentation of Brazil’s tax system make it particularly onerous to enterprises, making it a priority for reform. The state-level VAT has often been used as an industrial policy instrument, resulting in predatory tax competition among the states. Remaining federal levies on enterprise turnover are detrimental to the competitiveness of Brazilian exports. The burden of payroll taxes and social security contributions encourages labour informality. A reform package is under discussion in Congress. The draft legislation is well thought-out; it proposes to unify the state-level VAT, to replace federal levies on enterprise turnover by a federal VAT and to alleviate the tax burden on labour income. Options for compensating those states that are expected to lose revenue as a result of the VAT reform include an overhaul of the country’s regional development programmes. The authorities’ main policy challenge in this area is to secure political support for reform, especially among the state governments, in a manner that is revenue-preserving, efficiency-enhancing and consistent with ongoing fiscal-adjustment efforts.
Chapter 4 Making government operations more cost effective
Despite considerable progress in many areas, there remains substantial scope for making government operations more cost-effective. Brazil spends a high share of GDP on selected government-financed programmes in relation to many OECD countries and its emerging-market peers, but outcome indicators are often comparatively poor. As a result, in the absence of efficiency gains, further increases in spending would need to be financed through additional tax hikes and, most importantly, would likely fail to deliver commensurate improvements in outcomes. Initiatives to enhance the efficiency of government operations are therefore necessary and call for concerted action in many policy areas. The largest payoff would most probably come from greater emphasis on longer-term budget planning to facilitate the identification of, and secure adequate funding for, cost-effective programmes. At the same time, enhanced budget flexibility would make it easier for policymakers to shift budgetary resources towards the programmes that are most cost-effective. Options are being considered for developing the recently discovered offshore oil fields and to ensure that the revenue accruing to the budget is saved or allocated to programmes with the highest returns for future generations.
How to obtain this publication
The complete edition of the Economic Survey of Brazil is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Brazil Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Luiz de Mello and Mauro Pisu under the supervision of Peter Jarrett. Research assistance was provided by Anne Legendre.