Brazilian government debt has been declining over the past decade, falling from more than 60% of GDP in 2002 to 35% of GDP today. The current fiscal stance is compatible with a decline of the debt ratio of 1-2 percentage points a year. Gross general government debt, the more widely used indicator for purposes of cross-country comparisons, remains relatively high. But this is to a large extent due to the accumulation of FX reserves by the central bank and sizeable government lending to the state development bank.
Moreover, even a tangible increase in gross general government debt would be unlikely to cause problems. Assuming, very conservatively, a real interest rate of 7%, real GDP growth of 3%, and taking into account the lower financial return on government assets (mainly FX reserves, loans to BNDES) relative to their financing costs, general government debt could increase by 20-30% of GDP from current levels without jeopardising public-sector solvency. With government debt on a downward trajectory, however, the equilibrium real interest rate is not likely to rise back to its historical average – and each 100bp decline allows the government to reduce its primary surplus by an additional 0.4-0.5% of GDP.
Over the medium to long term, rising social security and health outlays on the back of aging demographics will put pressure on the evolution of public finances. The combination of a generous social security regime – Brazil spends way more as a share of GDP than other economies with a comparable level of per capita income and is experiencing, at the margin, a more rapid change of its demographic profile – may turn into an increasingly important fiscal challenge over the medium to long term. The net present value of the increase in pension and health-related expenditure exceeds 100% of GDP in Brazil. A rapidly rising (albeit from a low level) old-age dependency ratio combined with generous social security benefits will sooner or later force the government’s hand.
Moreover, even a tangible increase in gross general government debt would be unlikely to cause problems. Assuming, very conservatively, a real interest rate of 7%, real GDP growth of 3%, and taking into account the lower financial return on government assets (mainly FX reserves, loans to BNDES) relative to their financing costs, general government debt could increase by 20-30% of GDP from current levels without jeopardising public-sector solvency. With government debt on a downward trajectory, however, the equilibrium real interest rate is not likely to rise back to its historical average – and each 100bp decline allows the government to reduce its primary surplus by an additional 0.4-0.5% of GDP.
Over the medium to long term, rising social security and health outlays on the back of aging demographics will put pressure on the evolution of public finances. The combination of a generous social security regime – Brazil spends way more as a share of GDP than other economies with a comparable level of per capita income and is experiencing, at the margin, a more rapid change of its demographic profile – may turn into an increasingly important fiscal challenge over the medium to long term. The net present value of the increase in pension and health-related expenditure exceeds 100% of GDP in Brazil. A rapidly rising (albeit from a low level) old-age dependency ratio combined with generous social security benefits will sooner or later force the government’s hand.
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| Source: IMF |