Brazil Inflation Hits Twelve-Year High, Economy Shrinks

The economic news coming out of Brazil keeps getting worse. Politicians seem unsure what to do.

The port of Salvador, Brazil, July 1, 2012
The port of Salvador, Brazil, July 1, 2012 (Monitoramento/ME/Portal da Copa)

Brazil’s economic woes are going from bad to worse. Inflation, at 10.3 percent, has climbed to its highest in twelve years and the economy is projected to shrink 3 percent this year, central bank data shows.

Unemployment has risen from 5.3 percent at the start of this year to nearly 8 percent last month.

The actual unemployment rate is probably higher because up to half the jobs in the country are informal.

Out of control

The Financial Times reports that government spending is out of control. The total deficit, including interest, is likely to come in at 9-10 percent this year. Debt is now equal to 66 percent of national income and rising.

Although that is less than in other troubled countries such as Greece, the cost of servicing Brazil’s debt, at about 20 percent a year, is astronomical.

Yet, as the Atlantic Sentinel has reported, Brazilian politics are paralyzed.

Left-wing president Dilma Rousseff is struggling to keep her coalition with the big-tent Brazilian Democratic Movement Party together. The latter said this week it would not leave the government — for now. “It’s not the right moment,” according to aviation minister Eliseu Padilha.

But the party, which owes much of its popularity to patronage, has blocked reforms that could boost Brazil’s competitiveness, including cuts to workers’ benefits.

Failure to liberalize

Indeed, the downturn owes much to both parties’ reluctance to liberalize Latin America’s largest economy. During the boom years, they used the proceeds from rising commodities exports to Asia to finance social spending instead.

Since Rousseff’s Workers’ Party came to power in 2003, incomes have risen faster than economic output. Private debt has expanded dramatically.

Rousseff tried to slow things down in her first term by limiting pension payouts to civil servants and capping government contributions for new hires. But Brazil’s pension program is still among the world’s most generous. The average Brazilian can retire at 54 with 70 percent of pay. Pensions take up 13 percent of gross domestic product.

By contrast, the country spends just 1.5 percent of its economic output on infrastructure, compared with a global average of 3.8 percent, even though its weak network of ports, railways and roads is a huge bottleneck to more sustainable growth.

A overly complicated tax code and excessive regulation stifle business activity. The World Bank considers Brazil to be the worst place in the world to file one’s taxes.

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