ABSTRACT
Starting from the consolidated government budget constraint it is possible to illuminate a number of issues concerning Brazil’s current economic situation. The main conclusions that emerge from the analysis are that the fiscal imbalance will require a substantial increase in the government’s debt in real terms and that the impact of this increase on interest rates may have perverse explosive intertemporal consequences. We then discuss and dismiss the “new (external) money” solution for the problem, arguing that Brazil does not face a foreign exchange problem, but a domestic budgetary problem. The debt-service transfer is being made, but not by the principal debtor, the government. The private sector pays the external bill for the government and becomes the government’s creditor domestically. In the long run, to obtain simultaneous external and internal balance Brazil will have to solve the internal budgetary problem.
KEYWORDS:
Deficit; public debt; adjustment