IMF and FGV?s IBRE evaluate Brazil?s fiscal risks at an event in Rio de Janeiro

Institutional
10 May 2013

After decreasing for nearly a decade as a result of responsibility and control policies implemented by federal and state governments, fiscal risks are increasing again in Brazil, threatening the hard-won gains in macroeconomic stability and sustainability of public finances in the long run. The warning was made by economist Teresa Ter-Minassian, former director of the Fiscal Affairs Department of the International Monetary Fund (IMF), when closing the seminar Brazil?s Fiscal Risks in the Middle and Long Term, promoted by The Brazilian Institute of Economics (IBRE) at FGV together with the Fund on April 25-26, in Rio de Janeiro. The economist granted an exclusive interview which will be published in the May edition of IBRE?s The Brazilian Economy magazine. A worrying reversal has occurred in recent years, with the proliferation of accounting artifices to create a semblance of adherence to fiscal goals: progressive reduction of public sector coverage, anticipated revenues and postponement of cash payments, transactions with sovereign wealth fund and the use of companies and public banks in quasi-fiscal operations, Teresa said at the event, which brought together national and international experts. According to the former IMF director, such procedures tend to weaken the importance of the public sector primary surplus concept as an indicator of the nature of fiscal policy, undermining the credibility of fiscal institutions and policies, both domestically and in international markets. Besides, she notes, the growing web of cross-financing among government, companies and public banks makes it difficult to quantify the fiscal risks and contingent liabilities over the medium term. From the point of view of government financial control, the economist recommends austerity in granting new debt to subnational governments and a review of the Brazilian social security system, which is classified as too generous, in an international perspective, with regard to retirement age, mechanisms of benefits indexation and the relation among retirement and pensions and the salaries of the active labor force. The medium to long term outlook is of a substantially higher deterioration, given the rapidly aging population. As the contribution rates are already high, reform efforts must focus on the benefits side, aligning the system with international best practices, she concludes.