OECD suggests that Brazil reduces trade barriers, reinforces investments and removes constraints from the Budget By Reuters

2023-12-18 21:01:15

© Reuters. OECD Headquarters in Paris, France 03/09/2009 REUTERS/Charles Platiau

By Bernardo Caram

BRASILIA (Reuters) – The Organization for Economic Cooperation and Development (OECD) recommended this Monday that Brazil seek efficiency and productivity gains by correcting distortions such as high trade barriers and an excessively tied budget, in addition to stimulating investment public and private with a focus on the green agenda.

The 2023 edition of the document with a diagnosis of the Brazilian economy brings positive assessments about the resumption of activity since the cooling of the Covid-19 pandemic, highlighting the recent process of reducing inflation in the country, and advocates fiscal responsibility to support monetary policy.

The report also projects that Brazil’s public debt will continue to rise even with the approval of the new fiscal framework and tax reform. The OECD scenario points to a gross debt of 80% of GDP in 2024, against the current 74.7% of GDP.

OECD simulations also suggest that this level will reach 90% of GDP in 2047, in a scenario that already “assumes that the new fiscal framework adopted and the tax reform are implemented, increasing potential growth by around 0.5 percentage points”.

To improve this scenario, the report recommends that the government move forward with structural reforms, such as a new round of changes to Social Security rules and consolidation of social programs.

The OECD pointed out that the government’s new framework for public accounts establishes fiscal targets and expenditure limits, with mechanisms for correcting course if the objectives are not achieved, but emphasized the need to remove constraints from the Budget.

“The budget process is limited by widespread revenue earmarking and minimum mandatory expenditure limits, along with strong automatic indexation,” he said.

In this area, the government promised to re-discuss how to calculate minimum spending on health and education, linked to revenue performance, which ends up compressing the Budget.

The report, produced before the final approval of the consumption tax reform by Congress, highlighted that the approval of the proposal and the validity of the new fiscal framework will boost economic activity.

Assessing that activity has been recovering and had strong expansion in the first half of this year, the OECD stated that there is now a convergence towards the economy’s potential growth. The report estimates that Brazil will grow 3% in 2023 and 1.8% in 2024.

The document stated that inflation in the country is falling, emphasizing that an increase in long-term fiscal credibility could help the work of the Central Bank and allow interest rates to fall further.

“Preserving the credibility of monetary policy is essential to keep inflation expectations firmly anchored,” he said.

TRADE BARRIERS

In one of the recommendations, the OECD stated that Brazil’s access to foreign markets and deeper integration in global value chains could be facilitated by reducing trade barriers, amid some discussions in the Luiz Inácio Lula da Silva government that are moving towards opposite way.

The multilateral institution pointed out that Brazil’s average import tariffs are around eight times higher than those of Mexico, for example.

“Non-tariff barriers are also relatively high, including widespread local content requirements,” he said.

Recently, with the justification that it seeks to stimulate domestic production, the government announced that the Import Tax exemption for electric vehicles will be eliminated. In another area, a possible ban on the import of biodiesel for use in the mandatory blend of fossil diesel to benefit local production is being debated.

In the area of ​​sustainability, the document suggests that Brazil strengthen its environmental policies and invest in climate-resistant infrastructure, highlighting that spending on works is low and inefficient, and it is also necessary to encourage the participation of the private sector.

“Creating adequate conditions for private investment will require rethinking current risk-sharing mechanisms,” he stated, amid debates within the government to launch an exchange rate protection instrument for long-term sustainable investments.