Brazil: Selected Issues

This Selected Issues paper focuses on challenges and options for reform in Brazil. This paper discusses options to build on the new fiscal rule and enhance the fiscal framework. The new rule’s focus on revenues carries important implementation risks, and consolidation that is more ambitious is needed to achieve a downward debt path. Building on Brazil’s and cross-country experience with fiscal frameworks, this paper proposes options to build on the new fiscal rule and enhance the fiscal framework. The new proposed fiscal rule addresses important priorities of the new government and offers opportunities for gradual fiscal consolidation over an extended horizon, but important challenges remain. There is scope to shape a more comprehensive and integrated fiscal framework, leveraging specific advantages of rules. Further considerations to refine the proposed new fiscal rule include ensuring consistency of the spending rule and the primary balance targets, while making the latter more binding. The existing fiscal framework would also benefit from a strong fiscal anchor that puts debt on a firmly declining path, rebuilds buffers, and embeds a medium-term perspective. Further options to strengthen the framework include addressing the procyclical bias, coupled with institutionalizing the escape clause and considering a mechanism to smooth commodity revenues, and hardening budget constraints for subnational governments.