Brazil’s economic recovery following the recession of 2015−2016 remains slow. Real per capita growth has fallen by 8% since the onset of the recession in 2014, and poverty and inequality are on the rise. Although the unemployment rate has dropped this year, it is still high compared to pre-crisis levels.
To boost growth and create more jobs, Brazil needs to vigorously pursue pension and tax reforms, trade liberalization, infrastructure investment, and key financial reforms, the IMF stated in its latest annual economic assessment.
For example, the pension reform currently under discussion in Brazil’s Congress is a landmark step towards rejuvenating the country’s economy. Continuing to implement these policies—which are a core part of the government’s agenda—will be crucial for improving Brazil’s future growth.
The IMF’s economic assessment highlights the following six points:
1. Brazil’s economic recovery remains slow, but is expected to strengthen in 2020. After the recession of 2015−2016, real GDP grew by only 1.1% in 2017 and 2018. Growth is expected to remain moderate at 0.8% in 2019. The approval of the pension reform—currently in Brazil’s Congress—and progress in finalizing and implementing the government’s structural reform agenda would boost GDP growth to 2.4% in 2020.
2. Putting debt—currently at 88% of GDP—on a more sustainable trajectory is crucial for economic growth. Public debt is high by international standards and is increasing, exposing Brazil to debt sustainability risks.
3. The ongoing pension reform is a crucial initial step to reduce debt. Spending on pensions and public salaries represents a large share of total government expenditure. Without reforms, pension spending is expected to increase substantially, driven by Brazil’s aging population. Besides being unsustainable, the current system is also detrimental to income distribution. The pension reform currently under consideration in Congress is also essential for putting debt on a sustainable trajectory.
4. Measures to improve the tax system will help attract investments. Brazil has a complex tax system. For example, the ICMS—which is the Tax on Circulation of Goods and Services—is important in terms of revenue. However, it is also rife with distortions and substantial exemptions. Given the relatively high tax burden, tax reform should aim to harmonize the system and reduce costly and distorting tax exemptions while raising the same amount of revenue. Simplifying the tax system would also boost private investment. Revenue-neutral tax reform is high on the government’s priorities and could follow pension reform.
5. The Brazilian economy would benefit from opening up. Brazil is one of the most closed economies in the world due to tariff and non-tariff barriers. Opening up to more trade is essential to improve competitiveness and could provide a much-needed boost to investments. In this regard, the recent EU-Mercosur trade agreement and efforts to comply with OECD liberalization codes offer important opportunities to foster trade integration.
6. Closing the large infrastructure gap would boost productivity. Brazil’s public capital stock and infrastructure quality are below those of similar countries due to low public investment—particularly in infrastructure—over the past two decades. Reducing the infrastructure gap will require that public investment funds be spent more effectively, complemented by mobilizing private capital through concessions.
Source: International Monetary Fund