The adjustment of public déficit in the presence a high debt: observations about the Brazilian case

This article examines the obstacles to public sector adjustment arising from the existence of a high level of government debt in the form of short-term or floating interest rate obligations. In this context, adjustment programmes that rely exclusively on increases in taxation and/or reductions in non-financial government expenditures have limited possibilities of success. Besides making the budget highly vulnerable to increases in external and internal interest rates, the size and composition of Brazilian public debt severely restrict the effectiveness of monetary and exchange-rate policies. The article concludes that under present circumstances a successful stabilization programme would have to involve fiscal adjustment, a shock treatment against inflation, and a restructuring of government debt.

KEYWORDS:
Fiscal adjustment; public debt; fiscal policy