Brazil - Without renewed economic growth, the fiscal situation is unsustainable.

Drift and Decline in Brazil's Economy

by Juan deOnis

The economy of Brazil, once held up as a model of what a BRIC emerging market can do, has begun to set off alarm bells in the populist government of President Dilma Rousseff as the ruling party tries to halt its current decline. In Brazil, political economy means putting the economy at the service of political goals, mainly through measures that improve the electoral prospects of those already in power. With annual growth at a measly 2 percent, foreign balance of payments $50 billion in the red, and the exchange rate for Brazil’s currency, the real, down more than 30 percent since the start of the year, Rousseff’s Workers Party is already worried about the October 2014 election. This decline comes after Rousseff and her finance minister, Guido Mantega, both proponents of state intervention in economic affairs, have thrown billions of dollars in public investments, credit stimuli, and consumer subsidies into a failed attempt to produce vigorous growth.

This is not yet a full-blown crisis. Employment remains high, mainly through low-paying service jobs. The informal economy, which pays no taxes, is thriving. Consumer spending remains high, stimulated by easy credit, but family debt has reached a limit for many borrowers. The most ominous sign of economic malaise is inflation, which is increasing prices of goods and services at a rising pace, now over 6.8 percent a year by the official index and 10 percent by private calculations. Tax collections are declining and the budget deficits of state governments are increasing beyond legal limits. Without renewed economic growth, the fiscal situation is unsustainable.
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