By Marcela Ayres
BRASILIA, Oct 15 (Reuters) – As Brazil’s presidential runoff campaign enters its final stretch, both candidates are focusing plans for fiscal adjustments on politically palatable measures, reinforcing economists’ views that strategies to curb the country’s rising debt burden will only come to light after the election.
The country’s gross debt has risen more than 10 percentage points during President Luiz Inacio Lula da Silva’s current term, reaching 82.9% of gross domestic product (GDP), as the leftist incumbent seeks reelection after unexpectedly trailing Senator Flavio Bolsonaro in the first round earlier this month.
Right-wing Bolsonaro entered the race promising a faster fiscal adjustment, targeting a 1.5% of GDP improvement in the primary balance within 18 months to trigger a confidence shock and lower borrowing costs.
Long-term interest rates have fallen sharply since Bolsonaro’s first-round victory, reflecting investor optimism about a potential change in government, although his campaign has yet to explain how such an adjustment would be delivered.
Lula’s campaign has also pledged fiscal consolidation, albeit at a slower pace, while saying that spending cuts should not fall on lower-income Brazilians, a message that has defined the president’s economic agenda.
With polls showing Bolsonaro ahead by a narrow margin, both campaigns have stuck to politically safe fiscal proposals, sidestepping measures that would tackle the structural causes of Brazil’s worsening fiscal outlook, analysts say.
Economists broadly agree that the main challenge lies in the rapid growth of mandatory spending and an increasingly rigid budget. The federal government’s discretionary spending accounted for only about 7.6% of total expenditures last year, versus 14.2% in 2000, when Brazil’s Federal Budget Panel series began.
Bolsonaro’s economic adviser Daniella Marques rejected suggestions that a future administration would reduce social benefits, saying pensions and welfare programs would be untouched.
“You can make the government work by cutting its own excesses,” Marques told broadcaster Band on Wednesday, pointing to things like cuts in political appointments and ministries, among other measures.
Lula’s running mate Geraldo Alckmin has argued fiscal consolidation should focus on tackling campaign funding and outsized salaries earned by some public-sector workers.
Neither campaign has confronted the deeper reforms required to stabilize debt, said Rafaela Vitoria, chief economist at Brazilian lender Inter.
“There is no short-term magic solution,” she said. “The debate on structural measures is extremely difficult during an election campaign because they are unpopular.”
Gradual adjustment remains feasible, Vitoria said, adding that discussions over benefit indexation rules, mandatory spending and overlapping social programs will likely have to wait until after the election.
(Reporting by Marcela Ayres; Editing by Oliver Griffin and Aurora Ellis)
Brought to you by www.srnnews.com
