By Falilou Fall, Priscillia Fialho, and Jens Arnold, OECD Economic Department

Brazil’s economy has recovered strongly from the consecutive shocks of the last years says the latest OECD Economic Survey of Brazil. This year, buoyed by good weather and a record-high harvest, the economy is expected to grow at 3%, which is far above its long-term growth trend over the last decade. Unemployment is at its lowest level since 2015, while inflation has returned to the central bank’s target after having risen to almost 12% in mid-2022. Even if in the next years growth will fall short of the exceptional performance of 2023, the current OECD projections of 1.8% in 2024 and 2.0% in 2025 are strong in historical comparison, and are largely driven by expanding domestic demand.

The time has now come to re-focus on the pressing structural challenges that Brazil is facing. These include limited fiscal capacity that hampers necessary investments, weak productivity performance, and the need to end deforestation in the Amazon, after visible increases during 2018-2022.

Building fiscal space will help to focus on policy priorities

With gross public debt exceeding 80% of GDP (Figure 1), rebuilding fiscal buffers is important to ensure that the public sector can undertake the necessary investments in education, social protection and infrastructure in the future. This will require credible deficit targets that guide fiscal policy over the next years. A recently legislated new fiscal framework is expected to become an essential tool in this context, as it combines a clear path for fiscal outcomes with safeguards for public investment, which has all too often fallen victim to fiscal adjustments in the past.

Figure 1. Rebuilding fiscal space is important
Evolution of public debt

Source: CEIC; Central Bank of Brazil.

Making the most out of scarce fiscal space will also require more agile budgeting processes. These are currently characterised by widespread revenue earmarking and mandatory spending floors that commit 91% of the budget. This limits the government’s ability to address priority policy challenges.

Further important fiscal reforms are either ongoing or planned. A fundamental overhaul of Brazil’s notoriously complex system of consumption taxes has just been approved by Congress. Moving from a fragmented system of consumption taxes towards a unified value-added tax system will make tax compliance much easier for firms and reduce a number of tax-induced distortions that hold back growth. Beyond consumption taxes, there is scope to reform personal income taxes, including with a view towards making them more progressive.

Raising productivity and growth inclusiveness

Productivity has been on a declining trend since 2010, and compared to other emerging market economies, Brazil’s per capita growth has been substantially weaker (Figure 2). This is particularly worrying in light of rapid population ageing. A young population has underpinned economic growth in the past, as more and more people were joining the labour force. Over the next 25 years, however, population ageing  is expected to reverse the entire growth dividend that Brazil has reaped from more favourable demographics since the turn of the millenium.

Figure 2. Weak productivity performance and infrastructure competitiveness are impeding stronger growth
Average annual GDP per capita growth, 2012-2021

Source: World Bank; and OECD calculations.

Years of insufficient infrastructure investment have given rise to logistics bottlenecks and high transportation costs, which are one factor behind Brazil’s weak productivity performance. But scarce resources are not the only challenge. Improvements in planning and project execution could substantially improve the performance of many infrastructure projects. As a result of challenges in project management, public infrastructure investment has delivered results that have often fallen short of expectations. 

Competition, another key driver of productivity growth, has been held back by complex regulations and administrative burdens, some of which shield incumbent firms from potential new market entrants. Recent regulatory reforms have led to improvements in this area, but market entry barriers in services sectors remain above the OECD average. Further regulatory reforms in professional services, including the abolition of exclusive rights for certain ancillary tasks, can stimulate competition in crucial markets. Manufactured goods remain subject to elevated trade barriers, with average import tariffs approximately eight times higher than in Mexico. Lowering these trade barriers can facilitate access to foreign markets and foster a deeper integration into global value chains.

Mobilising currently underutilised labour resources and improving education outcomes is equally essential for sustaining stronger long-term economic growth. Womens’ labour force participation and employment rates lag approximately 20 percentage points behind those of men. The pandemic has exacerbated educational disparities by leaving a stronger mark on children from disadvantaged backgrounds. Prioritising investments in the early years of schooling and expanding access to early childhood education, especially for children from disadvantaged backgrounds, have the potential to reduce gender inequality and equip children with better opportunities later in life.

Making growth more sustainable

Deforestation, the largest contributor to greenhouse gas emissions, has increased since 2018, but policy priorities have changed and early indicators now suggest a decline in 2023. Strengthening enforcement of the Forest Code, coupled with allocating more resources to enforcement agencies, will aid in tackling deforestation. Emissions from agriculture, the second-largest source of greenhouse gas emissions, primarily arise from livestock (Figure 3). Better regulations and stronger incentives for more sustainable production hold significant potential for reducing these emissions. Energy emissions are already fairly low given the significant share of hydroelectric energy sources, but also solar and wind energy, where Brazil’s still untapped potential could turn into a major competitive advantage in the future. The planned introduction of carbon pricing mechanisms will be a milestone in the transition towards a lower-carbon economy.

Figure 3. Deforestation and agriculture are the main sources of greenhouse gas emissions
Million tonnes of CO2 equivalent, 2021 or latest

Source: OECD environment database; Estimativas Anuais de Emissões de Gases de Efeito Estuda no Brasil (6ª Edição), Ministério da Ciência, Tecnologia e Inovação; and OECD calculations.

References

OECD (2023), OECD Economic Surveys: Brazil 2023, OECD Publishing, Paris, https://doi.org/10.1787/a2d6acac-en

By Volker Ziemann, OECD Economics Department

In 2020, over a quarter of total CO₂ emissions in the OECD originated in the housing sector. These emissions are generated through space and water heating, cooling, ventilation, lighting, and the use of appliances and other electrical plug loads. Homebuilding is also emission-intensive, accounting for 6% of total CO₂ emissions.

Figure 1. Housing accounts for a large share of CO₂ emissions

Sectoral decomposition of OECD CO₂ emissions and energy use, 2020

CO₂ emission levels vary considerably across countries ranging from nearly three tonnes per capita in the United States to almost zero in Norway. These vast differences indicate that even countries with harsh climates can achieve low emission levels. One of the keys to decarbonising the housing sector is to reduce direct emissions from on-site combustion of fossil fuels such as oil and natural gas for heating and cooking. Electrification and energy efficiency improvements are the primary vehicles to get there. Reducing indirect emissions, those originating from electricity use, then hinges on decarbonising electricity production.

Figure 2. Several countries have high home energy needs, but low CO₂ emissions

Total CO₂ emissions and energy use of the residential sector, 2020

Most OECD countries have pledged to reach net-zero emissions by 2050, and some have set even more ambitious targets to achieve this goal earlier. Bringing the housing sector on track to meet these targets requires stepping up efforts and going beyond environmental regulation and encompassing economic, social, innovation, tax, and spending policies.

The recent OECD working paper, “Home, Green Home: Policies to Decarbonise Housing“, delves into the various policy options for rapidly decarbonising the housing sector and recommends to:

• Align carbon prices of energy used in homes with those that apply to other sectors. This can be achieved by explicitly taxing the carbon content of energy sources or by emission trading (applied to energy suppliers).

Figure 3. Effective carbon rates are a long way from being similar across sectors and countries

EUR per tonne of CO₂

Panel A: Building use

Panel B: Electricity sector

• Ensure carbon-free electricity generation, as a lot of the decarbonisation of homes will have to come from their electrification.

• Overcome the split incentive problem between landlords and renters by allowing landlords to recover part of the energy bill saving from energy-efficiency improvements when rent levels are updated.

• Extend energy performance certification to all properties, not only those for sale.

• Strengthen energy efficiency standards on appliances and new buildings to align with the net-zero emission target.

• Offset adverse effects of mitigation measures on vulnerable social groups without blunting incentives to save energy.

• Focus on retrofitting the worst existing housing units.

• Abolish remaining subsidies for fossil fuel boilers.

• Lead the way by building new and retrofitting existing social housing units according to high environmental standards.

• Promote greater international comparability and transparency of green building standards to facilitate alignment of green real estate assets with the net-zero target.

• Ensure local-level regulations, spending power, and resources are consistent with national decarbonisation goals.

Implemented together, these policy instruments can decarbonise housing at a pace compatible with climate targets and in a way that is consistent with social-inclusion objectives while avoiding unnecessary economic costs.

References:

Hoeller, P. Ziemann, V. , Cournède, B. and M Bétin (2023), “Home, green home: Policies to decarbonise housing “, OECD Economics Department Working Papers, No. 1751, OECD Publishing, Paris, https://doi.org/10.1787/cbda8bad-en.