THE RICH WORLD SHOULD BEWARE BRAZILIFICATION / THE ECONOMIST

The parable of Brazil

The rich world should beware Brazilification

When governments are indebted, high interest rates wreak havoc

Photograph: Ian Cheibub/The New York Times/Redux/Eyevine

The world economy offers many cautionary tales. 

Argentina’s inflation has shown the danger of treating a central bank like a cash machine. 

Italy’s stagnation shows the downside of joining a currency union with high legacy debts. 

Britain has suffered from Brexit which has thrown up barriers to trade with its closest neighbours. 

But the most timely warning for many of the world’s big economies comes from Brazil.

As we report, Brazil has decent economic growth, an independent central bank and its primary budget—that is, excluding interest payments—is almost balanced. 

Its net debts, at 66% of GDP, are high by emerging-market standards but low by rich-world ones.

Brazil, however, has one big problem: its government must pay sky-high interest rates to service its debts. 

Controlling inflation has required the central bank to set short-term rates at 15%. 

As a result—and despite being close to primary balance—the government will probably borrow about 8% of GDP a year to pay its interest bill. 

Closing the deficit through austerity is unlikely; President Luiz Inácio Lula da Silva, who is campaigning for re-election in October, has loosened the purse strings. 

Unless interest rates fall a lot, public debt will surge.

The fiscal plight of Brazil casts rich-world budgets in sharp relief. 

You may think governments in wealthier places are fiscally squeezed, but America, Britain, France and Italy still enjoy borrowing costs in the low-mid single digits. 

Their debts would stabilise if only they balanced their primary budgets, or came close to it. 

By contrast, Brazil would probably need to run a primary surplus of around 5% to keep its debts stable, if interest rates do not fall.

Western policymakers should consider why interest rates are so high in Brazil. 

The answer lies in a combination of factors. 

Brazil’s institutions, despite enjoying formal protections like central-bank independence and the separation of powers, are wobbly—and teetered during President Jair Bolsonaro’s attempted coup in 2022. 

Inflation is on a shorter fuse, even after three decades of technocratic central banking, owing in part to a legacy of hyperinflation in the 1980s and early 1990s and an economic crisis in the mid-2010s.

Last, the long-term trajectory of the budget is dire. 

Brazil’s government spends 10% of GDP on pensions. 

Without reforms, by 2050 it will spend more on pensions than richer, greyer countries. 

Yet pensions are protected in the constitution, which for example requires that when the minimum wage rises, retired folk get more money, too. 

The extraordinary hold of pensioners over the budget makes it hard to balance the books, and also crowds out other more worthwhile spending.

The diagnosis should worry the rich world, which shows early symptoms of Brazilification. 

America’s institutions are suffering. 

President Donald Trump has politicised the Justice Department, yearns to control the Federal Reserve and muses about federalising his country’s elections. 

After the big price rises that followed the pandemic, and with geopolitics menacing supply chains, inflation is a greater risk than in recent decades. 

And spending on pensions and health care is growing as populations age. 

Pensions might not enjoy the same level of formal protection as in Brazil, but older voters like them. 

Just look at Britain’s “triple lock”, which ensures that pensions outpace wage growth in the long term.

If this pushes up interest rates, today’s budget dilemmas could seem trivial. 

Many rich countries are straining to find an extra 1% or 2% of GDP for defence spending. 

Imagine if they had to find that twice over again for debt interest. 

It might seem painfully difficult in a populist world both to promise low inflation and to spend less on the elderly. 

But that is nothing compared with the agonising choice that looms for Brazil: between deep austerity and a terrifying debt-interest spiral.