BRASILIA--The Brazilian government's focus on hitting its target for a primary budget surplus is a relic of the days when the country risked defaulting on its borrowing from foreign lenders, and some economists are pushing anew for that to be abandoned in favor of a goal for the overall budget deficit.
Targeting a primary surplus budget--the government surplus before payments on its debts--diverts attention away from a genuine budget problem faced by Brazil, which is that despite strong and rising tax revenue, the government is running an overall deficit.
"It's like a David Copperfield trick, they talk about the primary surplus when everyone else talks about the nominal deficit," said Alberto Ramos, head of Latin American economics at Goldman Sachs in New York.
"Changing the focus to the fact that they still run a deficit would be good. And taking into account that the tax burden is very high puts the deficit in the proper context."
By running a primary surplus, a country shows that it is capable of generating more revenue than it is spending, and so can pay down at least part of its debt.
The primary surplus is easier for governments to control, as they can manage their own spending and revenue. The nominal deficit calculation includes a key variable that is out of their control, namely the interest rate paid on the country's debt.
The primary surplus target has been used by Brazil for more than a decade, since the International Monetary Fund and other lenders advanced a massive loan in 1999 to help the country pay its foreign debt, which had skyrocked after a dramatic depreciation of the Brazilian real.
The primary surplus target "made sense when we needed fiscal discipline to pay back lenders," said Alfredo Barbutti, an economist at the Liquidez brokerage in Sao Paulo. "We're creditors now, not debtors, so we don't have that problem anymore."
A move now could be politically astute. The nominal deficit for this year will be equal to about 1.2% of gross domestic product, less than half the 2.5% in 2011, and it will be tightened again in 2013, to 1% of GDP, according to the government.
The government's goal for the primary surplus this year and next is 3.1% of GDP. To be sure, the debate has been going on for years, and the government and markets still remain focused on the primary surplus.
In its 2009 Economic Survey for Brazil, the Organization for Economic Cooperation and Development recommended the change and said Brazilian authorities had "expressed their intention to redefine the fiscal rule" to emphasize the overall budget balance.
The government might now be getting ready to start moving the country towards taking a closer look at the nominal deficit.
When asked about why there is still a focus on the primary surplus, a Brazilian government source explained that it is easier for the government to meet the primary surplus target, but added that the nominal deficit is gaining importance.
"Cutting the deficit is more complicated because that depends on interest rates, and that's something we don't control," said the government official, who asked not to be identified.
"But the government is paying more and more attention to the deficit and to reducing debt."
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Targeting a primary surplus budget--the government surplus before payments on its debts--diverts attention away from a genuine budget problem faced by Brazil, which is that despite strong and rising tax revenue, the government is running an overall deficit.
"It's like a David Copperfield trick, they talk about the primary surplus when everyone else talks about the nominal deficit," said Alberto Ramos, head of Latin American economics at Goldman Sachs in New York.
"Changing the focus to the fact that they still run a deficit would be good. And taking into account that the tax burden is very high puts the deficit in the proper context."
By running a primary surplus, a country shows that it is capable of generating more revenue than it is spending, and so can pay down at least part of its debt.
The primary surplus is easier for governments to control, as they can manage their own spending and revenue. The nominal deficit calculation includes a key variable that is out of their control, namely the interest rate paid on the country's debt.
The primary surplus target has been used by Brazil for more than a decade, since the International Monetary Fund and other lenders advanced a massive loan in 1999 to help the country pay its foreign debt, which had skyrocked after a dramatic depreciation of the Brazilian real.
The primary surplus target "made sense when we needed fiscal discipline to pay back lenders," said Alfredo Barbutti, an economist at the Liquidez brokerage in Sao Paulo. "We're creditors now, not debtors, so we don't have that problem anymore."
A move now could be politically astute. The nominal deficit for this year will be equal to about 1.2% of gross domestic product, less than half the 2.5% in 2011, and it will be tightened again in 2013, to 1% of GDP, according to the government.
The government's goal for the primary surplus this year and next is 3.1% of GDP. To be sure, the debate has been going on for years, and the government and markets still remain focused on the primary surplus.
In its 2009 Economic Survey for Brazil, the Organization for Economic Cooperation and Development recommended the change and said Brazilian authorities had "expressed their intention to redefine the fiscal rule" to emphasize the overall budget balance.
The government might now be getting ready to start moving the country towards taking a closer look at the nominal deficit.
When asked about why there is still a focus on the primary surplus, a Brazilian government source explained that it is easier for the government to meet the primary surplus target, but added that the nominal deficit is gaining importance.
"Cutting the deficit is more complicated because that depends on interest rates, and that's something we don't control," said the government official, who asked not to be identified.
"But the government is paying more and more attention to the deficit and to reducing debt."
nasdaq.com
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