The Brazilian Fiscal Crisis: The Lost Credibility

By Tatiana Acar

[7 min read]

 

Assessing how credibility affects both the economy and individuals in a tangible way is a complex issue in the economic debate. We can conceive the delicate concept of confidence through the image of a horse being trained to jump obstacles. In order to gain his trust, the athlete needs to show commitment and respect. With sufficient warning, the horse tends to follow his commands, and both will have a durable relationship. However, unexpectedly forcing it to jump will make the horse suspicious. If surprised, he can harm the athlete and destroy all the environment around him. Worse, once the trust is betrayed, it is hard to recover it. Brazil’s current crisis scenario could be linked to this metaphor since the fiscal misconduct seen in the last years has undermined the population’s confidence and generated great disarray among consumers, businesses, and investors. Output growth has fallen more than 7% in two years[1], causing unemployment more than doubling[2]. Recovering the lost development will consume a large part of Brazil’s next presidential term, which has been predicted by some analysts already[3]. But why has the country reached this stage? What is the relationship between credibility and the level of employment and income?

Credibility is built when people notice, over time, that the government has not only committed to the policy it communicated, but it has also managed to achieve its goals[4]. When a government spends continuously and increasingly, uncertainty about the country’s fiscal solvency tends to be higher. Thus, the effect of fiscal stimulus on the economy and individuals might become counterproductive by pushing up long-term interest rates, inflationary expectations and undermining longer-term growth prospects. This puts the government into a dangerous vicious circle, as the fall in the output causes a drop on tax revenues, further increasing the fiscal imbalance.

Continue reading “The Brazilian Fiscal Crisis: The Lost Credibility”

Brazil Talk in 90 Seconds – The Pension System


Brazil Talk in 90 Seconds is a series of videos, one every week, with news analysis from Brazil. This week we talk about the reform of the pension system. On Wednesday, government officials met with members of Congress and union leaders to discuss seven proposals to pension reform. This is a very urgent and controversial topic because Brazil’s pension deficit increases by 50% every year. Yet, any reform that scales back benefits will be extremely unpopular, particularly in an election year and during economic crises. Moreover, the government does not have the support of President Rousseff’s own party – Partido dos Trabalhadores – and other parties on the left, which will make a reform less likely to be approved by Congress.

Brazil Talk in 90 Seconds: Economic Outlook


Brazil Talk in 90 Seconds is a series of videos, one every week, with news analysis from Brazil. This week we talk about the pessimistic economic outlook after Carnaval celebrations. GDP is expected to shrink between 3% and 4% in 2016 and inflation is projected to continue rising until the end of the year. In the meantime, Rousseff’s administration decided to postpone the announcement of spending cuts until March, raising speculations that the government is ready to reduce costs as required.

Brazil Enters a Recession and Officials are Divided Over How to Resolve It

by Silvio Ramirez

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Brazil is South America’s largest economy, the seventh largest economy in the world, and was considered, for many years, as a favorite for investors. For the past decade, Brazil has benefited from a global commodities boom. During President Luiz Inacio Lula da Silva’s two terms in office, Brazil enjoyed rapid economic growth by capitalizing off of soaring commodities prices and a booming China willing to purchase iron ore, oil, and soya beans from Brazil. Brazil’s commodities boosted tax revenue and the Lula administration was able to create a government cash-transfer program that helped 30 million Brazilians escape poverty. As a result, consumer spending expanded. More recently, however, Brazil’s economy has started to tank due to the commodities bust and China’s sluggishly performing economy. Making matters worse, Brazilian officials are indecisive on what actions to take to enhance economic performance.

Continue reading “Brazil Enters a Recession and Officials are Divided Over How to Resolve It”

Event with Tereza Campello, Brazil’s Minister of Social Development and Fight Against Hunger

Last week, Brazil Talk participated in an event with Brazil’s Minister of Social Development and Fight Against Hunger, Tereza Campello, at Columbia University. Mrs. Campello is responsible for the leading widely recognized programs such as Fome Zero and Bolsa Família, two of the most important social policies adopted by Brazil in the last decades. Minister Campello discussed the social impacts of these policies in the last ten years. Prof. Albert Fishlow, Prof. Sidney Nakahodo (both members of Brazil Talk’s Advisory Board) and Prof. André Lara Rezende (former president of the Brazilian Development Bank – BNDES) were also present at the event.

Check out the pictures!

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