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Brazil Fiscal Trends in the 1980s
Sources: The Library of Congress Country Studies; CIA World Factbook
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    In the 1980s, most Brazilians were convinced that the huge foreign debt was at the heart of their economic difficulties. A decade later, as other heavily indebted developing nations reduced inflation to negligible levels and began to grow again, it was more apparent that some of Brazil's economic difficulties were homemade. By the early 1990s, a new consensus had emerged among Brazilian economists and policy makers. It emphasized the role of the public sector in the economy and, more specifically, the way in which public-sector expenditures are financed.

    By the late 1980s, the overhang of public debt had placed a servicing burden on the public sector that would have strained any government. Given its huge debt to private Brazilian creditors and foreign creditors alike, the public sector came to be viewed as practically bankrupt. With new foreign credit virtually eliminated after 1982 and domestic credit increasingly costly, the government's only remaining recourse was to finance its deficit through the creation of money. This led in turn to an accelerating and unpredictable rate of inflation, which by the early 1990s was more than 4,000 percent at annual rates.

    Fiscal Trends in the 1980s

    In an inflationary economy like Brazil's, there are severe technical problems in quantifying fiscal trends. The basic difficulty stems from a large domestic public debt that is owed in cruzeiros. A large part of reported government expenditures is interest payments that simply compensate the debt holders for the effect of inflation (see table 14, Appendix). Government interest payments exploded in the 1980s, rising from less than 1 percent of GDP in 1980 to an unmanageable 6.1 percent in 1989, before being halted temporarily by the government freeze on payments in 1990. Despite the fact that new foreign resources were unavailable to Brazil after 1982, interest payments on the existing public-sector external debt also increased substantially over the 1980s.

    An increase in domestic and foreign interest payments could be financed if other parts of the public sector's accounts were to change enough to create a "primary" budget surplus (approximately the difference between tax receipts and noninterest-related public expenditures). In Brazil the reverse happened. The noninterest-related surplus declined sharply, beginning in the 1970s and accelerating in the late 1980s.

    A number of reasons account for this trend. Tax receipts as a share of GDP declined significantly in the early 1980s, partly as a result of the difficulties inherent in maintaining tax collections with accelerating inflation. By the late 1980s, tax receipts, net of transfers for such items as social security, were insufficient even to pay for public-sector wages and salaries and purchases of goods and services.

    On the expenditure side, Brazil's return to a more open, democratic political system in the mid-1980s made it difficult, if not impossible, for political leaders to contain public expenditures for personnel costs, goods, and services. Between 1980 and 1990, the share of such expenditures in GDP mushroomed from 9.2 to 15.6 percent.

    Grim as these trends were, they were probably underestimates of Brazil's true fiscal situation. In the early 1970s, the public enterprises were operated profitably, and the prices of their products and services at least kept up with inflation. With the acceleration of inflation after the two oil shocks in the 1970s, the fiscal position of the public enterprises began to worsen, although this trend was not recognized widely until the 1980s.

    It was not until the 1980s that the Brazilian government, partly because of pressure from foreign creditors and multilateral organizations, such as the International Monetary Fund (IMF--see Glossary) and the World Bank (see Glossary), began to publish more extensive statements on the public sector's finances. In 1983 the government began preparing estimates of the Public Sector Borrowing Requirement (PSBR). These estimates included not only the expenditures of the federal, state, and local governments but also those of state enterprises, social security authorities, and a number of previously "off-budget" activities. These estimates clearly show that Brazil's fiscal imbalances worsened even more in the 1980s than is suggested by more traditional measures.

    Had the worsening trend in the PSBR been simply the result of increases in nominal interest payments, inflation alone might have been blamed. In fact, many of the intellectual proponents of what became the Cruzado Plan made this argument in the 1980s. These proponents maintained that if inflation could be stopped (through a price freeze or other means), the public sector's deficit would disappear. Even if the effects of inflation were accounted for, however, Brazil would have had a large public-sector debt.

    Data as of April 1997

    NOTE: The information regarding Brazil on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Brazil Fiscal Trends in the 1980s information contained here. All suggestions for corrections of any errors about Brazil Fiscal Trends in the 1980s should be addressed to the Library of Congress and the CIA.

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Revised 10-Nov-04
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