Brazil ‘considers fiscal stimulus’

4 Jun 19

Brazil’s hawkish economy minister is poised to take a major U-turn by embarking on a fiscal stimulus in a scramble to prevent recession.

Paulo Guedes has indicated the government is considering putting together a 20 billion reais ($5bn) fiscal stimulus package, Reuters reported.

The move appears to be a response to figures released last week that show Latin America’s largest economy shrank in the first quarter for the first time since 2016, putting it on a recessionary precipice.

Another quarter of negative growth would inaugurate Brazil’s sixth recession in 20 years.

Although the government under the rightwing populist president Jair Bolsonaro registered a primary surplus in April of R$6.5bn, this is the lowest result for the month since 1998 and has been blamed on a real-terms decline in revenue.

Guedes is struggling with what he has admitted is a rapidly deteriorating fiscal situation and has already cut the government’s 2019 growth forecast to 1.5% from 2.2%.

The Economy Minister is a deficit hawk committed to slashing public spending, making any signal that he may be considering a stimulus a sign that the government now sees it as urgent to restore Brazil’s fortunes.

Guedes has pinned considerable hope on a package of fiscal reforms, and in particular a major pension reform that aims to save 1.237 trillion reais ($315bn) over the next decade.

The IMF forecasts public debt will reach 90% of GDP this year – among the highest of any emerging economy – and the pensions overhaul is seen as a critical to restoring confidence in Brazil’s fiscal position.

However, both Bolsonaro and Guedes have not been adept at the complex politics of reform, and public dissatisfaction is growing, with students leading large protests against higher education cuts.

Anonymous sources told Reuters that cash for a stimulus could come from workers’ guarantee funds known as FGTS – which are contributed by employers and act as an emergency cash buffer if staff need to buy a home, lose their job, or become sick.

Guedes said last week that that the government may free up active and inactive FGTS accounts if his pension reforms are approved by congress and then implemented.

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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