Global Insight Perspective
Investment under the Programme to Accelerate Growth (PAC) will amount to 504 billion reais (US$236 billion at current prices).
The PAC is set push up GDP growth by half a percentage point each year, so the Brazilian economy would grow 4.5% in 2007 and 5.0% in each of the following three years of President Lula's second term. According to the plan, fiscal targets will not be challenged and the government should still be able to post a primary surplus of 4.25% of GDP; however Finance Minister Guido Mantega has indicated that the target might be cut to 3.75% in 2007 to fund infrastructure projects.
Global Insight forecast Brazilian GDP to expand 3.7% this year and expects a slight acceleration to 3.8% in the 2008-2010 period; however, if successfully executed, the PAC will push the investment-to-GDP ratio from its current levels (14-15%) to 20-21%, under which conditions it would not be difficult for the Brazilian economy to post growth rates in the 4.5-5.0% range
A Five-Pillar Programme
The PAC is based on blocks: investment in infrastructure, credit and financing promotion, enhancing the investment climate, tax exemptions and improvement of the tax system, and long-term fiscal measures. The 504-billion-reais package is aimed at infrastructure spending and is distributed as follows: 171 billion reais for social infrastructure, 275 billion reais for energy related projects and 58 for logistics. The government will implement a series of measures to promote credit financing, especially for housing and long term investment in infrastructure, a key player in this area is the National Development Bank (BNDES), which is expected to continue to reduce its long-term rates as well as its spreads.
A number of measures to enhance the investment climate are in the pipeline such as improving the regulatory framework to cut red tape and expedite investment. The fourth pillar of the programme relies on tax exemptions, mainly for investments in infrastructure. The government estimates that the exemptions will amount to 6.6 billion reias in 2007 and 11.5 billion reais in 2008. A tax reform (or the extension of the previous one) is also on the program. Finally, among the long-term fiscal measures are: the control of payroll expenditure—salaries will not increase more than 1.5% in real terms; a revamping of the social security administration; and a long-term policy that determines the value of the minimum wage.
Brazil's Growth Challenge
Despite an increase in macro-economic and financial stability since President Lula took office for the first time in January 2003, faster growth rates have remained elusive. GDP growth averaged just 2.6% in Brazil between 2003 and 2005, well below the regional average for the same period (of 4.0%). Compared with other BRIC economies, such as China or India, the rate of GDP growth in Brazil has been even more disappointing. None the less, Brazil could be growing at a faster rate and needs to if it is to make further progress in terms of poverty alleviation and debt reduction.
BRIC GDP Growth
f = GII forecast
The PAC's focus on infrastructure investment will be welcomed as a move to remove constraints to sustained growth. Under-investment in the energy sector was regarded as one of the structural causes of the 2001 energy crisis and if energy supply does not expand at a faster rate then this could ultimately slow growth. Greater investment in roads and ports has also long been considered a potential obstacle to the growth of exports from the agri-business sector.
The tax breaks, regulatory reforms, and proposals to reduce government bureaucracy will also help to create a more positive climate for investment in infrastructure and the technology sector. However, there may be some disappointment that there is not a stronger commitment to structural reform. Lula's main rival in the 2006 campaign Geraldo Alckmin had pledged to send a proposal to Congress to simplify the tax model in the first week of government, but the PAC relies mainly on discretionary tax breaks for selected sectors rather than a reduction in the overall corporate tax burden. Nevertheless, the second phase of the tax reform approved in 2003 does appear to have gained a new momentum with its inclusion as one of the long-term measures in the PAC and President Lula's call for a unified value-added tax rate in his inauguration speech earlier this month.
However, it is the absence of a strong commitment to further social security reform in Lula's second term that will be the main disappointment to investors. Although a number of measures are aimed at limiting the expansion of the social security deficit, the aim of the proposed National Forum for Social Security seems to be discussing proposals rather than implementing further reform. Instead the government wants to secure the approval of a bill already in Congress to regulate the 2003 reform.
Outlook and Implications
The long-awaited economic package unveiled yesterday is aimed at bringing about 5% average annual GDP growth. Global Insight forecast Brazilian GDP to expand by 3.7% this year and expects a slight acceleration to 3.8% in the 2008-10 period. If successfully executed, the PAC will push the investment-to-GDP ratio from its current levels (14-15%) to 20-21%; under these conditions it would not be difficult for the Brazilian economy to post growth rates in the 4.5-5.0% range
Although the PAC includes tax breaks already included in the budget or a law promoting small and micro-sized businesses approved late last year and most of the energy sector investment was already programmed, the PAC will require the approval of at least 11 provisional measures and 5 bills by Brazil's Congress. This means that the success of the economic growth package will ultimately dependent on President Lula's ability to maintain the unity of his governing coalition in order to secure the passage of reforms. In the case of further tax reform, the support of all levels of government including Brazil's governors will also be needed.