{"id":94993,"date":"2025-07-21T11:37:54","date_gmt":"2025-07-21T14:37:54","guid":{"rendered":"https:\/\/murray.adv.br\/?p=94993"},"modified":"2025-07-21T11:37:54","modified_gmt":"2025-07-21T14:37:54","slug":"public-debt-will-keep-rising-without-tough-fiscal-reform-study-warns","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/public-debt-will-keep-rising-without-tough-fiscal-reform-study-warns\/","title":{"rendered":"Public debt will keep rising without tough fiscal reform, study warns"},"content":{"rendered":"
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MCM 4Intelligence projects debt-to-GDP ratio above 100% in multiple scenarios within 10 years<\/em><\/strong><\/h6>\n<\/div>\n<\/div>\n
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07\/21\/2025<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/section>\n

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Brazil\u2019s public debt is on track to exceed 100% of GDP within the next decade, even if a mild fiscal reform package is approved, according to a study by consultancy MCM 4Intelligence. The analysis, which ran thousands of simulations based on Brazil\u2019s economic and fiscal performance over the past 20 years, highlights growing concerns among economists ahead of this year\u2019s elections.<\/p>\n<\/div>\n

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In a scenario where no policy changes are made, there is a 53% chance that the debt-to-GDP ratio will surpass 100% within ten years, with a 61% probability of crossing this threshold at any point during that period. The baseline assumptions include a real interest rate of 5%, average GDP growth of 2.4%, and a primary surplus of 0.5% of GDP. Brazil\u2019s gross debt currently stands at 76.1% of GDP.<\/p>\n<\/div>\n

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Under a scenario involving diluted reforms, the probability of debt exceeding 100% within a decade still reaches 25%, rising to 32% when considering the possibility of it happening at any point in the next ten years. This projection assumes that, starting in 2027, the government achieves an average primary surplus of 1.5% of GDP through a set of measures: delinking healthcare and education spending from GDP growth and adjusting them only for inflation; indexing pensions and other social benefits to inflation plus half of real GDP growth; cutting wage bonuses to half the minimum wage; reducing legal tax exemptions by 10%\u2014which the Finance Ministry estimates at over R$800 billion\u2014and trimming parliamentary budget earmarks by 10%, from R$50.4 billion in 2025.<\/p>\n<\/div>\n

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The study\u2019s conclusions diverge sharply from the outlook of Dario Durigan, the Executive Secretary at the Finance Ministry. Speaking at a Brazilian Development Bank (BNDES) event earlier this month, Mr. Durigan said it was possible to resolve Brazil\u2019s debt challenge within five years \u201cthrough spending controls and fiscal rebuilding.\u201d He acknowledged that returning to primary surpluses at the current Selic interest rate level is \u201cneither viable nor feasible,\u201d but suggested there was room for interest rate cuts \u201csoon.\u201d<\/p>\n<\/div>\n

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The analysis by economists Alexandre Teixeira, Renan Martins, and political consultant Ricardo Ribeiro uses stochastic modeling, which employs historical averages and standard deviations of key variables to generate thousands of possible debt trajectories.<\/p>\n<\/div>\n

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\u201cThe advantage of this method is that it produces not just a single forecast but a wide range of possible outcomes, allowing us to gauge the likelihood of specific events,\u201d said Mr. Teixeira.<\/p>\n<\/div>\n

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The diluted reform scenario was designed as a softer version of a much stricter package that has been circulating among market economists in recent months. The harsher version, however, is widely seen as politically unfeasible, given strong opposition from President Luiz In\u00e1cio Lula da Silva and powerful congressional lobbies. It includes eliminating real increases for pensions and social benefits, tightening eligibility for welfare programs such as the BPC, ending the wage bonus, making deeper cuts to tax expenditures, and slashing parliamentary amendments to the average level seen between 2020 and 2024.<\/p>\n<\/div>\n

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According to MCM\u2019s estimates, such a strict package could generate an average primary surplus of approximately 3% of GDP over ten years. \u201cWith this level of fiscal adjustment, it\u2019s not hard to show the debt could be stabilized,\u201d Mr. Teixeira noted.<\/p>\n<\/div>\n

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Other institutions have reached similar conclusions. A recent World Bank study estimated the effort needed to stabilize Brazil\u2019s debt trajectory at 3% of GDP. The Independent Fiscal Institution (IFI) calculated the required primary surplus at 2.4%.<\/p>\n<\/div>\n

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A tougher fiscal adjustment could lead to a 3% primary surplus within a decade, MCM says<\/p>\n<\/div>\n

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The study also tested a third scenario, using the same parameters as the diluted reform case but with two adjustments: it assumes the reforms enhance fiscal credibility, lowering the real interest rate to 4.5%\u2014the same level recorded between 2016 and 2019 after the approval of Brazil\u2019s spending cap\u2014and reducing interest rate volatility by halving its standard deviation.<\/p>\n<\/div>\n

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In this case, the probability of debt exceeding 100% of GDP virtually disappears. \u201cThe key takeaway is that investors need to view the reform as sufficient. For any reform to be effective, it must clearly signal debt stabilization,\u201d Mr. Teixeira said. \u201cA reform that is too lenient may not achieve this goal.\u201d<\/p>\n<\/div>\n

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Other institutions, such as IFI, have also published stochastic scenarios, though typically based on their baseline cases. In its latest Fiscal Monitoring Report, IFI estimated a 72.7% chance of gross debt surpassing 90% of GDP by 2029.<\/p>\n<\/div>\n

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In the annexes to the 2026 Budget Guidelines Bill (PLDO), the government indicated that the likelihood of debt exceeding 100% of GDP is low and only materializes in an \u201cadverse scenario\u201d involving a 100 basis point Selic rate shock starting in September 2025.<\/p>\n<\/div>\n

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The Finance Ministry, through its press office, said Mr. Durigan\u2019s comments reflect the baseline scenario prepared by the National Treasury\u2019s technical team, which assumes compliance with the fiscal targets set in the new framework. Under this scenario, debt peaks at 84% of GDP in 2029 before declining gradually. This aligns with the Treasury\u2019s latest Fiscal Projections Report, which forecasts a debt peak of 84.3% of GDP in 2028.<\/p>\n<\/div>\n

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The ministry added that its projections \u201crely on parameters consistent with current macroeconomic conditions and reaffirm the economic team\u2019s commitment to gradual, responsible, and sustainable fiscal consolidation.\u201d<\/p>\n<\/div>\n

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A recent report by Warren Investimentos did not assign probabilities but outlined three potential scenarios. Not even the baseline scenario\u2014which includes indexing the minimum wage to inflation from 2027 and freezing public sector wages until 2030\u2014was able to stabilize debt by 2035. Only in the \u201cadjustment scenario\u201d does gross debt decline after peaking at 92% of GDP in 2029. In this case, the primary surplus would reach 1.7% of GDP by 2030 and 2.0% by 2035.<\/p>\n<\/div>\n

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However, the measures in this scenario appear politically challenging: ending the minimum wage valuation rule and freezing public sector wages; abolishing the wage bonus; changing the minimum spending rules for healthcare and education; halving parliamentary earmarks; and cutting the federal contribution to the Fundeb education fund from 23% to 19%.<\/p>\n

*By\u00a0Marcelo Osakabe\u00a0\u2014 S\u00e3o Paulo<\/p>\n

Source: Valr International<\/p>\n

https:\/\/valorinternational.globo.com\/<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/article>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

MCM 4Intelligence projects debt-to-GDP ratio above 100% in multiple scenarios within 10 years     07\/21\/2025 Brazil\u2019s public debt is on track to exceed 100% of GDP within the next decade, even if a mild fiscal reform package is approved, according to a study by consultancy MCM 4Intelligence. The analysis, which ran thousands of simulations […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8106],"tags":[26260,26261],"class_list":["post-94993","post","type-post","status-publish","format-standard","hentry","category-murray-news","tag-public-debt-will-keep-rising","tag-without-tough-fiscal-reform"],"yoast_head":"\nPublic debt will keep rising without tough fiscal reform, study warns - Murray Advogados<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/murray.adv.br\/en\/public-debt-will-keep-rising-without-tough-fiscal-reform-study-warns\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Public debt will keep rising without tough fiscal reform, study warns - Murray Advogados\" \/>\n<meta property=\"og:description\" content=\"MCM 4Intelligence projects debt-to-GDP ratio above 100% in multiple scenarios within 10 years     07\/21\/2025 Brazil\u2019s public debt is on track to exceed 100% of GDP within the next decade, even if a mild fiscal reform package is approved, according to a study by consultancy MCM 4Intelligence. 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