"First, Brazil clearly went through a particularly acute case of the “political business cycle”, the well documented tendency for governments to ramp up spending before elections. The recent increases in big spending, first justified as an anti-cyclical, “Keynesian” response to the 2008 crisis, continued unabated even with economic growth topping 7 per cent a year. Now with the election won, there is no electoral reason to keep spending growth at the current level. The second unrecognized reality is that this spending surge is already causing serious imbalances in the economy. This can already be seen in very tight labor markets, surging imports, and continued high inflation for non-tradable items.
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Fiscal restraint is the key element of a new economic “model” for Brazil, and although changing fiscal policy is always slow and difficult, the incentives to do so now are great. As Rousseff knows, an economic crisis is the one sure way to lose political power."
Tony Volpon of Nomura
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