The contribution of fiscal policy to the Brazilian recent crisis: an analysis based on expenditure and tax multipliers for the central government in the period 1997-2018

Based on Blanchard and Perotti (2002)’s Structural VAR approach, this paper estimates fiscal multipliers for different components of Brazilian federal government’s expenditures, as well as for different sub-periods. Results suggest a higher and more persistent expenditure multiplier in the full sample, which includes the country’s current economic crisis, than in the period 1997-2014. The difference arises from only two components – social benefits and public investments –, which generate the highest multiplier effects. On the basis of these results, several simulation exercises are performed. If central government’s investment was held constant since the beginning of the fiscal consolidation plan in 2015, our estimates suggest that the level of GDP would be 1.4% higher than what we observed in 2017. If federal investment had instead expanded at the same average pace as in the period 2006-2010, GDP would have been 6.7% higher than observed. Finally, output would be 2.53% lower if social benefits had not continued to grow in 2016 and 2017 due to constitutional obligations.