Warning: Creating default object from empty value in /nfs/c03/h01/mnt/56080/domains/logos.nationalinterest.in/html/wp-content/themes/canvas/functions/admin-hooks.php on line 160
Tag Archives | Deficit

Brazilian Economy in the Doldrums

By Anupam Manur

Brazil is staring at a lost decade of economic output, with political upheavals, domestic economic crisis of falling output, debt and inflation and a stagnant external sector due to falling commodity prices internationally.

While the world is gripped with stories of Chinese slowdown, another economy is staring down the barrel of deep economic and political crisis and faces the possibility of a lost decade for economic growth. Brazil has had another contraction in the previous quarter and according to The Economist, by the end of 2016, the Brazilian economy may be 8% smaller than it was in the first quarter of 2014. The Economist’s GDP forecast for 2016 is particularly dire for Brazil, the largest economy in the downside projections, with over 2% contraction in real GDP.

The last time that the Brazilian economy saw positive growth was in the first quarter of 2014. So, Brazil is officially in a recession in 2015, going by the NBER definition of recession as contraction of output for two consecutive quarters.

 

Brazil's GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Brazil’s GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Amidst the economic downturn, Brazil is also facing a political upheaval. Dilma Rousseff  and many of her party members, who are part of parliament, face very serious corruption charges against them and are presently being investigated. They are alleged to have accepted billions of dollars in bribes in exchange for bloated contracts with Petrobras, the State controlled oil and gas company. Also, Joaquim Levy, the Finance Minister who was known to bat for greater fiscal austerity and structural reforms resigned last week. When the need of the hour is urgent economic reforms and a plan to kickstart the economy, the Parliament Is obsessed with the impeachment of President Rousseff. This implies that Rousseff does not enjoy the political capital to initiate any reform agenda, assuming she has one, to get the economy back on track.

Falling commodity prices have a big part to play in Brazil’s misfortunes. Brazil’s commodity exports, and with it, its GDP, had a spectacular rise along with China’s growth story. However, with China slowing down, demand for commodities has fallen and so have its prices. Oil, iron ore and soy beans account for more than half of the Brazil’s export basket and their prices have been depressed for quite some time now. Brazilian commodities index has slumped 41% since 2011, according to Credit Suisse. The average price that Brazil used to receive for a ton of iron ore has slumped from about $125 in 2011 at its peak to about $40 currently. Among the big commodities exporters of the world, Brazil has been hit the hardest.

While it may be convenient for Brazilian administration to blame global conditions for their weak economic performance, a closer look will establish Brazil’s home grown problems as the chief culprit. Australia is a bigger commodity exported and relies heavily on Chinese manufacturing industry for its GDP growth. The share of exports in Brazil’s GDP is 11.5 per cent while Australia’s is much higher at 21 per cent. Despite this, Australia is slated to grow at a 2 percent this year. Other major commodity exporters in Latin America such as Chile and Peru are also affected by the declining prices, but are yet slated to grow at 2-3 percent this year.

The reason for this is Brazil’s structural problems. While Australia handled the global 2008 recession with caution, Brazil followed an excessively loose monetary policy and uninhibited fiscal expansion. Brazil has been spending indiscriminately: the estimate of budgetary deficit for 2015 was 10 percent of GDP. The debt to GDP ratio in July 2015 was already 65 percent and was set to touch 70 percent by end 2015. Further, the government is running a primary deficit of $13.9 billion or roughly equivalent to 2.5 percent of GDP. Primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments, and excludes interest payments. This implies that Brazil is adding to the total debt at a far greater rate than it can afford to do. Rating agencies such as S&P and Fitch have already downgraded Brazil’s debt instruments to junk bond status, which will translate into even higher costs of borrowing.

Corporate debt has been on the rise as well for the past decade. It is presently as much as 63 percent of GDP. It does not help the government that much of this is from either state owned companies such as Petrobras or other companies who have the implicit backing of the Brazilian government.

Quite unfortunately for Brazil, the usual routes for recovery from a recession are unavailable to them. As aforementioned, public debt is far too high to accommodate a fiscal push to the economy. The need of the hour is, in fact austerity, but that is bound to depress the economy further.

Monetary policy does not have too much wiggle room either and the central bank is in a real fix. The SELIC rate, Brazil’s policy interest rate is at 15%. With 150,000 jobs being shed in the formal sector every month, there is a real clamour for reducing the rates. However, this might fuel inflationary pressures, which are already quite high and high inflation will drive away the investors further. The consumer price inflation is hovering around 10 percent and the real has been steadily depreciating.

Raising taxes is also going to be extremely difficult, as Mr Levy  found out. Part of the reason for him quitting the cabinet as Finance Minister was the political opposition both from the opposition and within his own party to raising taxes, cutting federal spending and general fiscal adjustment.

The only way out is unlikely to be popular. Ms. Rousseff needs to come out with a credible new plan for restructuring the economy. This will involve painful cuts to pensions and other social security measures along with slight increases in the tax rates. Finally, Brazil also has to look at improving its business environment. It is currently placed at 120th out of 189 countries in the Ease of Doing Business Report by the World Bank. Though it is definitely going to be a tough period for Brazil in the next few years, it must aim to reduce the duration and severity of the problem by following sound economic policies.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

Comments { 2 }

Primer on deficits

Today’s budgetary deficits are tomorrow’s taxes. Therefore, it is important to understand what deficit means, and how India has performed on this metric over the past few years. This post provides a primer on this topic.

Budgetary deficit occurs when the expenditures[1] are more than receipts (This is true for homes and nations).There are three types of deficits

  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit

deficit

Revenue deficit is defined as the difference between total revenue expenditure and total revenue receipts. The revenue deficit signals how much the government is spending when compared to its earnings to perform its day-to-day activities(like paying salaries etc.)

Revenue receipts are those government receipts which neither reduce assets nor create future liabilities. These are proceeds from taxes, interest and dividend from government investment, cess, and other receipts for services rendered by the government. Revenue expenditure includes those expenditures that neither creates assets nor reduces liabilities. These are expenditures on salaries of government employees, subsidies, grants (to state government and other entities), interest payments and pensions. These expenditures are short term and recurring in nature and mostly meant to ensure the daily functioning of the government.

Given this, revenue deficit shows how much the government is borrowing to finance its daily functioning. In the past few years, eliminating the revenue deficit has been the priority for both the Union and State governments. The Fiscal Responsibility and Budget Management Act, 2003 recommended elimination of revenue deficit by 2009.

Revenue deficit = Total revenue expenditure – Total revenue receipts

Fiscal Deficit is defined as the difference between total expenditure and total receipts (excluding borrowings) ie., any loans received as money are not counted as receipts.. Therefore fiscal deficit actually represents the amount of borrowing that the government must make to meet its expenses(this is the reason why the fiscal deficit is the most discussed number and a keenly observed number during the budget and by commentators.

Fiscal Deficit = Total expenditure – Total receipts(excluding borrowings)

Primary deficit is defined as the difference between fiscal deficit and interest payments ie., if the primary deficit is zero then, the governments borrowings will be used just to meet its previous borrowings. If the primary deficit is positive and significant, it feeds back into the interest payments in the following years, as fresh debt is created, for which interest has to be paid.

Primary deficit = Fiscal deficit – interest payments

 

deficit gdp

[1] There are two types of expenditures: Revenue expenditure and Capital Expenditure. Revenue expenditure is a cost that is charged to expense as soon as the cost is incurred.

Varun Ramachandra and Anupam Manur are Policy Analysts at Takshashila Institution. Varun tweets at @_quale and Anupam tweets at @anupammanur

Comments { 0 }