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Policy Briefing Paper Brazil Economy on Track or Runaway Train?

Autor:   •  February 1, 2013  •  Research Paper  •  3,045 Words (13 Pages)  •  1,552 Views

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The Brazilian economy has grown in nominal GDP since 2002 (except the 2009 Global Financial Crisis) based on inflation targeting, job creation, pension schemes and Keynesian reforms. By May 2011 unemployment had fallen to record lows of 6.4% which led to skilled labour shortages.

Real GDP growth is predicted to grow at 4.4% per year until 2050 (Coopers 2011), while strong personal and vehicle credit growth (60% in 2010) continues to occur though direct debit payroll deductions.

The population is aging and retiring early with population growth peaking by 2016. The money rate is currently set at 12.25%, one of the highest in the world. Infrastructure spending is significant in order to service 1million new government built homes per year, the 2014 World cup, the 2016 Olympics and high speed rail network.

The combined effect may soon trigger an inflation spiral, where monetary policy alone may have a negative impact on growth, while increasing inflationary pressures. Both fiscal and monetary policy changes are required to moderate the combined effects of the current growth. These are:

Labour Reform Policy Recommendations:

• Investment in trade schools and apprenticeships

• Mandate local labour apprenticeships for foreign infrastructure construction firms

• Provide education vouchers to stimulate uptake (demand) of education

• Paid education for unemployed women

• Legislate minimum educational requirement of year 12 completion

• Provide grants to schools and universities to subsidise placements to stimulate supply

• Immigration policy to attract skilled labour to fill shortfalls

Proposed Monetary Policy Response to Reduce Credit Consumption:

• Cap payroll deductions to limit safe lending credit availability

• Increase import duty and sales tax on vehicles

• Increase import duties on whitegoods

Pension Reform Policy Recommendations:

• Increase retirement age incrementally

• Shift to private pension funds to reduce GDP cost impacts on government spending

• Tax pensions above a set threshold

• Include pension payments as combined income when pensioners continue to work

• Introduce lump sum rebate scheme to continue working for a set period beyond 65 years of age

• Reduce indexed government spending linked to pension

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