Brazil's government debt is moderately high and growing

8 Nov 2012 by Jim Fickett.

I am going to put together a “dashboard” page for a few of the key economic indicators for Brazil. This will be by no means full coverage of Brazil's economy, but rather a set of indicators that should tell the direction on key trends and, in particular, give early warning of trouble.

One key indicator is government debt, for which there is a new Reference page. High inflation is typically preceded by excessive government spending (Bernholz, Monetary Regimes and Inflation, 5), and Brazil has a relatively recent history of hyperinflation (Brazil inflation). So any investor exposed to Brazil should keep a careful eye on government debt.

The right measure to use is general government gross debt. “General government” means that state as well as central government debt is included. That is important to avoid the mistake so many people made with Spain, of not realizing debt was high because many large programs, such as health care, are administered at the regional level, and so a great deal of debt that many didn't notice accumulated in the regions. Using gross rather than net debt avoids the error of counting assets but not liabilities of peripheral government entities like pension trust funds (Gross vs net government debt -- a tedious topic with important practical consequences).

Brazil's general government gross debt stands at about 60% of GDP.

(Data are from the IMF via the Fred system at the St. Louis Fed. The graph was generated by Fred.)

This compares favorably with the US and many European countries, where the comparable number is in the neighborhood of 100%, or Japan, where it is around 200%. So there is probably no immediate cause for concern. Nevertheless, 60% of GDP is substantial, and the number is rising. Further, the number is rising not only because of recent stimulus actions, but also because Lula, the previous president, increased real government spending by 50%, and these were mainly long-term commitments like pensions (Brazil -- unsustainable spending, still-high inflation). So it is quite possible that government debt will continue to rise substantially. Thus the need to keep an eye on it.