Brazil Risks ‘Lost Decade’ Without Fiscal Reforms, OECD Says

(Bloomberg) -- Brazil must cut spending and mandatory obligations to avoid a “recession like in the lost decade of the 1980s,” according to a study conducted by the Organization for Economic Co-operation and Development.

With debt levels soaring following the government’s pandemic-driven aid package, sustained growth hinges on fiscal adjustments and compliance with public expenditure rules, the OECD warned in an economic survey of Brazil published Wednesday.

“Without strong action financing costs could rise substantially, jeopardizing fiscal sustainability and depressing investment,” the Paris-based organization said.

OECD Secretary General Angel Gurria presented the findings of the 138-page report alongside Brazil’s Central Bank Chief Roberto Campos Neto and Economy Minister Paulo Guedes on Wednesday. Speaking from Paris, Gurria applauded the government’s swift policy response, but cautioned that the challenge ahead was “spending better, rather than spending more.”

The OECD expects Latin America’s largest economy to contract 5% in 2020 and grow 2.6% next year. The primary budget deficit, excluding interest payments, will increase to 10.7% of gross domestic product this year.

Spending Better

President Jair Bolsonaro’s economic stimulus program is widely credited for saving Brazil from a deeper recession and driving poverty down while the coronavirus raged. But its astronomical price tag -- which pushed public debt to over 94% of GDP -- has left markets on edge as the leader has tried to extend part of the aid after it expires at year-end.

On Wednesday, Guedes once again sought to assuage fears, saying his vision for the economy was in line with the OECD’s. “Brazil won’t make pandemic spending permanent,” he said.

The report recommended policy makers keep interest rates low until inflationary pressures become “clearly visible,” safeguard central bank autonomy, increase benefits of the Bolsa Familia aid program and index social-security increases to consumer prices rather than the minimum wage.

The OECD cited concerns with productivity, efficiency in spending, corruption and rising inequality. The report also called on Brazil to increase efforts to combat deforestation.

“Many of Brazil’s institutional and policy settings were made for a world that is very different from the challenges of today,” the report said.

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