Tackling Budget Rigidity in Brazil

Abstract

With recurrent fiscal deficits since 2014, the government debt as a percentage of GDP reached a level much higher than expected for a developing country. Despite the government efforts to contain expenditures, the excessive rigidity of the Brazilian budget constrains the degree to which the government can promote fiscal adjustments. In this MP, I raise the question of whether the adoption of a Medium-Term Expenditure Framework (MTEF) by the central government would reduce budget rigidity and, therefore, promote fiscal discipline. MTEFs are not specifically designed to tackle budgetary rigidities. Still, the implementation of these frameworks can create an ex-ante constraint, which limits decisions that may result in more mandatory and continuous expenditures. The establishment of a causal relationship between medium-term frameworks and fiscal discipline is beyond the scope of this project. Instead, I focus on the normative merits of using MTEFs and on drawing lessons from the experiences of Peru, Colombia, and South Africa. The level of budget rigidity might pose several challenges to the introduction of an MTEF in Brazil. However, a medium-term perspective to the budget can be the starting point for the government to scrutinize current fiscal policy, and to draw a path that aligns fiscal sustainability and national priorities. The moment to implement an MTEF seems to be ideal, as Brazil can no longer postpone the adoption of measures to restore the country’s fiscal sustainability.