Higher Inflation Target Offers Minimal Relief for Public Debt

Proposals suggesting an increase in the inflation target to facilitate Brazil's fiscal adjustment face technical resistance. Former Central Bank director Fabio Kanczuk points out that the fiscal gain generated by this measure would be insufficient to stabilize the public debt trajectory.

The calculation considers that each 1 percentage point increase in inflation results in an improvement of only 0.1% of the Gross Domestic Product. To cover a necessary adjustment of 3% of GDP, assuming half is achieved through other means, an additional 15 percentage points in the inflation target would be required to cover the remaining fiscal effort, which would push the index to 18% per year.

Kanczuk analyzes three channels of fiscal impact. The first is seigniorage, which represents the revenue obtained from issuing currency. The economist estimates that this gain is 0.04% of GDP for each additional point of inflation, although demand for currency may fall in high inflation scenarios.

The second channel involves primary expenses without automatic indexation, such as personnel costs. When inflation exceeds budget projections, the real value of these expenses tends to decrease momentarily. However, this saving is considered limited given the structural need for public account adjustment.

The scenario requires a primary surplus of 3.2% of GDP to stabilize the debt-to-GDP ratio, considering a real interest rate of 7%. The strategy of using inflation as a fiscal adjustment tool proves ineffective given the magnitude of Brazil's fiscal challenge.