The Organization for Economic Cooperation and Development (OECD) has urged Brazil to take steps to enhance the potential growth of its economy by addressing mandatory spending and trade barriers, according to its latest Economic Survey of Brazil.
The OECD's report pointed out that Brazil has made little progress in implementing the organization's advice from 2020, which recommended increasing the flexibility of the federal budget. The OECD specifically mentioned the need to scrutinize revenue earmarks, mandatory spending floors, and indexation mechanisms.
One noteworthy suggestion was to consider indexing social benefits to inflation rather than the minimum wage. President Luiz Inacio Lula da Silva has advocated for increasing the minimum wage above inflation to boost families' disposable income. However, this has led to an increase in mandatory government spending, as many federal expenses are tied to the minimum wage.
Despite introducing new fiscal rules this year that allow for increased spending above inflation by scrapping a strict constitutional spending cap, the OECD emphasized that the new framework still imposes limits on real spending growth. This situation results in accelerated growth of mandatory spending, leaving the government with limited flexibility to implement its policies.
While Finance Minister Fernando Haddad previously stated that the government would propose new rules for the growth of mandatory expenses by the end of the year, this idea has yet to materialize, and it remains politically sensitive for the leftist government.
The OECD's report also evaluated Brazil's trade openness, noting that although there has been some progress, the country still lags behind other emerging economies in this regard. The organization recommended reducing trade barriers as a means to improve access to foreign markets and enable Brazil to participate more actively in global value chains.
According to the OECD, Brazil currently maintains average import tariffs approximately eight times higher than those in Mexico. Additionally, the country has relatively high non-tariff barriers, including widespread local content requirements.
The OECD's recommendations underscore the importance of Brazil taking action to reform its fiscal policies and reduce trade barriers, potentially unlocking new opportunities for economic growth and international trade partnerships.