Brazil: The cost of delaying fiscal consolidation

Rubens Cysne and Carlos Thadeu de Freitas Gomes ()

Brazilian Journal of Political Economy, 2017, vol. 37, issue 4, 704-718

Abstract: In the present situation, the debt/GDP ratio in Brazil is increasing both due to the payment of interests and to a positive primary deficit. The later the fiscal adjustment is done, the higher must be the reduction of the primary deficit to attain long-run debt sustainability. This work makes the deduction of the cost of delay explicit and uses it to derive some data concerning the present Brazilian case. It considers three different scenarios and a two-and-a-half year period starting in June of 2016. The cost of delaying the adjustment is measured in terms of the additional reduction of the primary deficit relative to that which would have been necessary had the sustainability condition been met in June of 2016. Depending upon the scenario and on the concept of debt, a one year delay may demand between 0,14% and 0,67% of GDP of additional reduction of the primary deficit. The inertia may also lead to more uncomfortable figures, in case the average (logarithmic) yearly periodic real interest rate as of June 2016 exceeds 6,6%. Or if average GDP yearly growth is lower than -1,6% in the period considered. JEL Classification: E60; E62; E65; H63; H68.

Keywords: Brazilian economy; fiscal consolidation; fiscal deficit; primary surplus; debt solvency; debt sustainability. (search for similar items in EconPapers)
Date: 2017
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