Brasilia, 14 July 2009
Good morning, ladies and gentlemen. I offer my particular regards to Minister Guido Mantega and the other authorities present at this event which marks the launch of the latest OECD Economic Survey of Brazil.
I am very pleased to be participating at this launch. As you know, in 2007 the OECD launched an initiative that we call "enhanced engagement", to deepen cooperation with five non-member countries, including Brazil, in addition to China, India, South Africa and Indonesia, with a view to their eventually joining the organisation. There are another five countries (Chile, Slovenia, Estonia, Israel and Russia) that have already expressed interest in becoming part of the Organisation and are now in the accession process.
This "enhanced engagement" is giving a new boost to relations between the OECD and Brazil, which date back several years. Over that time, since 2001, we have published four economic surveys, including this last one, and a number of studies on the Brazilian economy. Moreover, Brazil is a member of the OECD Development Centre, and participates as a full member or observer in several of our committees. It should be noted that Brazil has already signed on to all the OECD instruments that are open to non-member countries.
It is worth observing at the outset that the launch of this economic survey comes at a particularly difficult time for the world economy. I am very pleased to note that, although Brazil has been hit by the global crisis, it has shown itself very well prepared for overcoming it and returning to growth. This is a fact not to be underestimated, and is due in large part to the adjustment efforts that Brazil has been making for many years.
Those efforts have been anchored in an institutional framework based on three pillars: a system of setting inflation targets, a fluctuating exchange rate, and fiscal responsibility. Thanks to this institutional framework, inflation is within the target range, despite last year’s sharp devaluation of the real – the fact that this devaluation did not spark any major inflationary pressures and did not upset inflation expectations can be laid to the credibility that the central bank today enjoys. The public debt – both external and domestic – is under control and is less vulnerable to exchange rate fluctuations. The current account deficit has been comfortably finance – by hefty inflows of foreign direct investment, among other things – and the level of international reserves is adequate to deal with the country's foreign commitments.
Even more important is the fact that, thanks to the macroeconomic adjustment now underway, Brazil has been able to implement countercyclical policies in response to the global crisis. Sound management of fiscal targets in the past has opened some breathing room today for a countercyclical fiscal policy, which includes safety net measures for the most vulnerable social groups. The primary surplus target for 2009 was reduced to allow automatic stabilisers to work freely without disrupting the medium and long-term dynamics of the public debt. Monetary policy has been conducted with skill in the context of declining inflation and soundly anchored expectations. We believe that this set of measures is appropriate for the Brazilian economy at this time.
In a setting of global crisis, it is natural that the economic policy debate should focus on the short term. But Brazil still needs to address a number of structural challenges in order to boost the long-term growth potential of its economy. We must remember that Brazil's income per capita (measured on a purchasing power parity basis) is still only around one-third the average level for OECD countries. Only with vigorous and sustained growth over several decades will it be possible to reduce this income gap. Finally, the biggest dividend of a solid economic policy is prosperity, the welfare of the citizenry, and social inclusion.
On the macroeconomic front, an issue that will have to be addressed without delay is the growth in public expenditure relative to GDP. This is important, for that growth requires a corresponding increase in the tax burden which, according to preliminary estimates and the data published last week by the federal revenue office, amounted to around 36% of GDP in 2008.
A tax burden of this magnitude is closer to the average of OECD countries than it is to the average of emerging economies. This also means that Brazil has to live with a tax system that is becoming increasingly onerous and is being used to finance public outlays that are not always the most efficient. It is for this reason that the latest Economic Survey stresses these two structural issues – tax reform and government efficiency – which we deem supremely important for Brazil if it is to take full advantage of macroeconomic stability for assuring sustainable long-term growth.
Tax reform is important for a series of reasons. Collection of the state sales tax – the ICMS – has sparked a "tax war" between the states, and is creating a series of distortions, especially through its impact on business decisions as to where, how and when to invest. The tax burden on gross business turnover, on capital goods (despite recent efforts at reduction) and on wages and salaries is also relatively high, and this hurts the competitiveness of Brazilian exports and generates incentives to work and produce "informally". When it comes to wages and salaries, taxes and social contributions eat up around 50% of the pay cheque, and this is certain to discourage the less-skilled workers, especially, from moving into the formal economy. We must remember that one in every five workers is not formally registered.
There are several options for fixing these distortions
In our assessment, the priority areas for reform should be: first, unify the ICMS legislation and adopt the principle of destination (and not of origin) in interstate taxation so as to curb predatory competition between the states; second, replace federal taxes and contributions that apply to sales – in some cases to gross sales – by a single federal VAT; and third, reduce the tax burden on wages and salaries, among other ways by gradually diminishing the employer contribution for social security.
The Brazilian government has sent a bill to Congress proposing forward-looking changes in this area. That bill is also innovative in the sense that it would improve regional development policies. This is very important in a federation of continental dimensions like Brazil, and one that has great income disparities between the federated entities. Experience in OECD countries that have implemented tax reforms in the past illustrates the need to seek some consensus on the main elements of reform. In Brazil's case, given the problems with its tax system, we must not underestimate the potential gains in terms of social welfare and efficiency that could come from tax reform.
The other structural issue highlighted in the Economic Survey is government efficiency. Previous surveys have already pointed out that public spending is relatively high in Brazil. According to our estimates, total government primary expenditure (excluding payment of interest) amounted to nearly 32.5% of GDP in 2008.
The country is spending around 9% of its GDP on health and education, in addition to about 12% of GDP on social protection (which includes pensions and social assistance). This is nearly as much as the average for OECD countries, yet many social indicators, such as the performance of Brazilian students in international examinations, fall short of countries with incomes even lower than Brazil's. This means that the country's problem lies not in a lack of spending capacity but rather in the quality of service delivery. In many cases, increasing budgetary allocations without striving for efficiency gains will just open the way to further waste.
Brazil has made undeniable progress in the social area – this includes reductions in poverty and in income inequality in recent years – and much of this can be credited to the strengthening of public policies over the last 15 years. For example, this is the case with basic education, which has been made universal since the late 1990s. We may also mention the basic healthcare programmes that have proven very effective in preventing illness and improving the health of needy population groups. Even in the management area, Brazil has some innovative e-government programmes, and has been one of the pioneers in using information technologies for handling income tax filings, government procurement, and elections.
Meanwhile, there is still much to be done, especially in terms of improving the quality of services where universal access has already been assured.
We must also recognise that innovative policies can take years and sometimes even generations to have a lasting impact, especially in the social area. Programme continuity is therefore essential. In the case of education, where Brazil's performance is so far below that of most OECD countries, the long-term gains to be reaped are enormous, not only in terms of productivity gains but also in terms of reducing poverty and social inequality.
The recovery of labour productivity over the years, and the consequent reduction in inequalities, must rely in large part on increasing workers’ education levels and accumulating human capital.
Our analysis also shows the importance of creating a culture of critical evaluation for government programmes and actions. It is not enough to identify the programmes that yield the best results for every real spent. What is needed is to use these evaluations in long-term planning, as a way to highlight successful actions, eliminate inefficient programmes, and reward innovative initiatives.
Budgetary flexibility is essential for this. Yet there are many devices, such as the earmarking of revenues, that make the budget fairly rigid and they often impede the reallocation of appropriations in favour of actions deemed efficient and consistent with long-term policy objectives.
We have stressed the need to reduce budgetary rigidity so as to facilitate use of the instruments that Brazil already has, such as the Multiyear Action Plan, in its long-term planning.
To conclude, I may say that we intend to continue publishing economic surveys on Brazil in the future. We hope that we can count on the support of the Brazilian authorities, therefore, in deepening our existing bonds of cooperation and in enriching the dialogue on economic policy even further, recognising how beneficial it can be for Brazil and for the member countries of the OECD.
Thank you very much, and in particular thank you, Minister Mantega, for your hospitality. I wish you all a good afternoon.