Gradualism And The Inflationary Fix

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Gradualism And The “Inflationary Fix” The new Finance minister Barbosa is now fully in command of the economic team and has issued his marching orders. Contrary to the approach of his predecessor, gradualism will be his strategy to achieve macroeconomic stabilization. The “shock and awe” strategy of the former minister Levy did a terrific job in correcting distorted relative prices. His having sweepingly removed heavy subsidies on fuel and utility prices, notably electricity rates, and managed a hefty exchange rate depreciation (the real lost 29% of its value against the US dollar in 2015) without triggering a currency crisis spared Brazil from both an energy and balance of payment emergency. But these are adjustments that depend solely on government will and market mechanisms. A key item of his envisaged stabilization plan was fiscal consolidation, which required intense political negotiation. Progress here was clearly unsatisfactory. The new Finance minister Barbosa will not push for a swift fiscal fix. Instead he is looking forward to incremental gains and thinks this is a more effective strategy in a convoluted political scenario. His first move was to tighten the grip on the execution of the 2016 budget and actual disbursements over the next months will be materially smaller than originally programmed (the budgetary bill in Brazil authorizes this expedient). His second move is to secure the approval of selected legislation that reduces mandatory spending over the

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