Brazil's fiscal tightening in 2015

According to the IMF Report of May 2015, Brazil's structural primary balance swung from a surplus in 2008 to a deficit in 2014, a much bigger deterioration than the automatic stabilisers, largely due to the acceleration in public spending and fiscal incentives.

The fiscal multiplier effect has been cut in half since the global crisis, which shows the almost total ineffectiveness of public spending and lending in recent years. The reduction in the Keynesian multiplier can also be explained by the Ricardian equivalence principle, which claims that increasing public debt today means increasing tomorrow's fiscal pressure in order to repay debt, which changes the savings and consumption behaviour of economic agents.

The measures adopted by decree or Congressional vote since the beginning of the year have generated a net gain of about BRL35bn (1.5% of GDP), most of which was obtained through tax increases and the elimination of tax exemptions, while parliamentary amendments reduced the government's proposed spending cuts by two thirds, to BRL6bn from BRL18bn.

"Public investment could be slashed by about 30% this year and other fiscal measures are also in the works, but it seems increasingly probable that the government will rapidly scale back its primary surplus targets for 2015 and 2016. Despite the healthy public accounts of local administrations and the stabilisation of central government spending in real terms, recessionary conditions squeezed government revenues in the first 5 months of the year", says BNP Paribas.