Despite Austerity Brazil's Wallet Looks Emptier Than Ever Before

(Bloomberg) -- Brazil has been adopting fiscal austerity measures for the better part of four years. Yet its fiscal situation is even more prickly than before.

As things stand today, the government next year will break a constitutional clause called the Golden Rule, which stipulates that it can’t issue new debt to finance current expenditures but only to fund investments. The shortfall? A staggering 150 to 200 billion reais next year.

How did Latin America’s largest economy get itself into this mess? When tax revenue eroded as economic activity plummeted in recent years, the government was forced to cut investments heavily because the bulk of Brazil’s budget - a whopping 91 percent this year - is earmarked by law and can’t be altered by the government. Now, there’s little left to cut.

To make matters worse, current expenditures such as salaries and pension outlays continued to grow. Housing assistance to members of the judiciary has grown 3,300 percent in the last three years, for instance.

"It’s a public sector that spends poorly, there’s a lot of inefficiency," said Alberto Ramos, chief Latin America economist at Goldman Sachs. "Brazil spends a lot and invests little."

The government says it’s studying ways to comply with the Golden Rule next year. Experts say that probably means requesting an exemption from Congress to finance expenditures with new debt.

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