In his talk at the Brazilian Senate Committee on Economic Affairs in August, Associate Professor of Economics Felipe Rezende discussed the proposed constitutional amendment that would limit public spending growth for up to 20 years.
If approved, the amendment — designed to limit public debt — would obligate the Brazilian government “to limit annual spending growth to the inflation rate of the prior year,” Rezende explains. “That is, public spending will be acyclical during bad and good times. The Lower House and then the Senate must decide whether to approve a constitutional amendment that would cap public spending rates and is expected to vote this year.”
But this decision, among other factors, “might make revenues even more sensitive to negative changes in output and income, thus increasing the deficit anyway,” says Rezende, who presented the first phase of his findings at a 2015 conference on banking and financial instability in Brazil, which he organized and coordinated.
“The issue here, and everywhere, is about debt sustainability and inflation that might result if debt monetization occurs,” Rezende continues. “However, much of the discussion is misplaced. Solvency is not an issue. Brazil is the monopoly issuer of Reais [Brazilian currency]. From inception, the Reais used to pay taxes and to buy government debt come from government spending and lending. As a matter of logic, the government necessarily spends first and then collects taxes, spends first and then borrows back the Reais it just spent.”
As the Brazilian government debt has increased, however, particularly during the past five years, “there is virtually a consensus that the trajectory of public debt is unsustainable,” he says. “This view, unfortunately, has spread everywhere.” However, most of the increase in gross government debt was due to Brazil’s central bank policy to acquire foreign currency and transfers of government debt to public banks. Though liabilities increased, it was offset by an increase in assets.
Rezende, who earned tenure this year, holds a B.A. in economics from Federal University, Rio de Janeiro, Brazil, and an M.A. in economics and Ph.D. in economics and mathematics from the University of Missouri-Kansas City. He has authored more than a dozen book chapters and articles, which have been published in a number of prestigious financial journals including Valor Economico, Brazil’s largest economic finance and business newspaper. He secured a grant from the Ford Foundation to direct a research project titled, “Financial Governance, Banking, and Financial Instability in Brazil: Analysis and Policy Recommendations.” He is a research fellow for the Multidisciplinary Institute for Development and Strategies, and has presented at nearly 30 conferences and professional meetings.