Brazilian Debt Jitters

LONDON – Two things have changed in fiscal policy worldwide in recent years. The first is that sustained low real interest rates have enabled governments to run larger deficits and carry larger debts. The second is that the coronavirus pandemic has made using this enlarged fiscal space imperative to bail out households and businesses and to stimulate economic recovery.

Advanced economies are spending whatever it takes to keep their economies afloat. In the United States, skeptics argue that President Joe Biden’s $1.9 trillion package may be too large, but no one worries that investors will refuse to buy the resulting debt or demand a risk premium. The story is different among emerging economies, which are less indebted than rich countries, but face higher interest rates and have smaller and more volatile tax revenues.

Among emerging economies, Brazil seems determined to test the limits of debt. The good news is that Brazil responded vigorously to the pandemic. Discretionary fiscal measures totaling 8.3% of GDP – more than in most emerging economies and even many advanced economies – helped poor households and contained the pandemic-induced recession, with output falling “only” 4.1% in 2020.