BRASILIA (Reuters) – The Organization for Economic Cooperation and Development (OECD) urged Brazil on Monday to reconsider its mandatory expenditures and dismantle trade barriers in order to bolster the potential growth of Latin America’s largest economy.
In its latest edition of the Economic Survey of Brazil, the OECD noted a lack of progress on its 2020 advice to make the federal budget more flexible by taking a closer look at revenue earmarks, mandatory spending floors and indexation mechanisms.
The multilateral organization, which Brazil began to join last year, suggested that social benefits could be indexed to inflation rather than the minimum wage, for example.
President Luiz Inacio Lula da Silva, who took office in January, has argued for raising the minimum wage more than inflation as a priority to boost families’ disposable income.
One impact of that is more mandatory government spending, as many federal expenses are indexed to the minimum wage.
Under new fiscal rules this year, the government can increase spending above inflation, after scrapping a strict constitutional spending cap.
Nevertheless, the new framework imposes limits on real spending growth, so fasted growth of mandatory spending squeezs out other expenditures, leaving the government with little flexibility to implement its policies.
Finance Minister Fernando Haddad said in April that the government would propose new rules for the growth of mandatory expenses by the end of this year, a politically sensitive idea for the leftist government that has yet to materialize.
When presenting new fiscal rules earlier this year, Treasury officials said it would be necessary to revise the floor for spending on health and education, which is currently linked to the level of government revenues.
The OECD also evaluated Brazil’s trade openness in its report, noting that despite recent progress, it lags other emerging economies. The organization suggested that lowering trade barriers could ease access to foreign markets and help the country participate more in global value chains.
“Average import tariffs are about eight times higher than in Mexico, for instance. Non-tariff barriers are also relatively high, including widespread local content requirements,” it said.
(Reporting by Marcela Ayres, Editing by Nick Zieminski)