Spending is forbidden in economic recovery
The twin policy of increasing expenses and taxes, which is customary in the search for a primary surplus, is exhausted and Brazil will have to use the bitter remedy of limiting public spending, said economist Eduardo Loyo, from BTG Pactual, at the opening speech of the 40th International Congress on Intellectual Property. “This measure, imposed by a constitutional amendment, will oblige us to fiscal consolidation, and will produce the side effect of segregating the discussion on spending and revenue”, stated the economist. If spending is limited by the ceiling, there is no point in reaching more revenue in order to spend more, as this is not allowed by the validity of the spending ceiling”.
According to Loyo, the fiscal adjustment will be very gradual and conditioned to the growth of the GDP (Gross Domestic Product), an issue that he considers key for the maintenance of the economic recovery process. “It is a topic of general interest to Brazil and crucial to economic sense. Our issue is primarily fiscal, and we must pay attention to it”.
In his speech, Loyo said that, with the pandemic, Brazil recorded three major surprises that had positive impacts on the economy. One was the operational resilience of the economy, much greater than previously thought. Another, the sustained demand for goods and services, which helped the government’s cash transfers to the population. Another big surprise was that the second wave, which came with less intensity than expected, allowed for a relaxation of the rules of social isolation. “The economy is recovering in Brazil and other countries at a much faster pace than expected”, he said.
However, according to the economist, despite the recovery, the pandemic left a legacy of uncertainty, “a behavioral shock”, which can affect investments. “Are families going to save more out of fear of what might happen in the future? Or will there be a social safety net and savings rates remain the same? Will investors continue to invest?” he asked. It is also necessary to consider the “gigantic” tax shock caused by the pandemic, reducing tax revenues, increasing expenses, and leaving a demand for new social protection mechanisms. “All of this will require long term digestion”, he concluded.