Fiscal Responsibility and Digital Transformation: Brazil's New Economic Agenda

Brazilians are acutely aware that maintaining fiscal discipline is crucial for sustained economic progress—a lesson underscored by the country's past experiences with hyperinflation. Fiscal responsibility, public debt sustainability, and sound economic foundations are essential for creating a stable environment that fosters public and private investment. Under Finance Minister Haddad's leadership, the Lula administration has pursued this agenda by approving a new fiscal framework, a comprehensive tax reform, and other measures to create a more equitable tax system. In less than two years, Brazil has experienced economic growth exceeding market expectations, alongside historically low unemployment rates and rising worker incomes. Additionally, credit rating agencies have improved the country's ratings. However, inflation, country risk and its impact on the exchange rate, low investment, and high interest disproportionately affect the country's poorest citizens. The success of this fiscal policy in fostering long-term equitable growth remains contingent on addressing these structural issues, which have historically limited the reach of economic progress to vulnerable populations. That is why we claim fiscal responsibility as a central element of a progressive policy for Brazil.

While a healthy macroeconomic environment is essential, more is needed to build a vibrant economy that generates opportunities for all. Brazil's most significant economic challenge ahead is its productivity lag compared to the most dynamic economies on the planet. As the demographic bonus wanes, future economic growth will increasingly depend on productivity gains. This concern is not exclusive to Brazil or Latin America. The recently published Draghi Report warns of Europe's lagging behind the United States and China. Lower productivity in the EU explains about 70% of the difference between the US and European GDP per capita. The report underscores that the central objective of a competitiveness program should be to increase productivity growth, which is crucial to long-term growth and leads to increases in living standards over time.

Brazil has introduced reforms that are increasingly expanding the economy's potential growth. The recently approved tax reform is intended to reduce the need for administrative resources—often tied to complex tax planning—redirecting them toward productive investments. Additionally, it aims to reduce the time it takes to do business in the country and the costs associated with navigating Brazil's notoriously complex tax system.

To reinforce the economy's capacity to create added value, Brazil must focus on responsible, active policies to promote industrialization, particularly in sectors where the country holds competitive advantages in the global economy. Effective industrial policy governance and robust public-private cooperation are critical factors in translating these efforts into higher long-term economic growth.

One of Brazil's most significant opportunities lies in the green economy as global industries rapidly transition to sustainable energy sources. Brazil's advantages in this area are notable: its hydroelectric power capacity, ethanol production, and biomass resources place it among global leaders in clean energy.  93% of Brazil's electricity, excluding oil-based sources, comes from renewable sources, and the country is the second-largest ethanol producer and third-largest biodiesel producer globally. Additionally, Brazil ranks among the top five producers of electricity from biomass. To densify technology and generate qualified green jobs, the Ecological Transformation Plan aims to leverage natural resources and accumulated expertise in clean technologies to produce high-value-added goods and services, emphasizing exports and boosting the GDP with an additional 0,4% annual growth, according to the World Bank. Initiatives such as the New Industry Brazil and the Growth Acceleration Program are designed to enhance value-added production and drive productivity gains. 

Brazil must take further action to close the gap with the most advanced economies, especially by improving education in terms of access and quality and aligning it with the needs of technological transformation. Brazil's performance in the PISA exam reveals key challenges. In Mathematics, the country's average score was 379 points below the OECD average of 472. Even Brazil's wealthiest students performed below their international peers and significantly lower than students in countries with similar socioeconomic profiles. To address these gaps, Brazil is promoting initiatives such as Pe-de-Meia, the resumption of the National Fund for Scientific and Technological Development, investment in federal technical institutes, and adjustments to graduate and research scholarships. These efforts aim to equip the workforce with the skills necessary for the evolving demands of the global economy.

One of the most critical drivers for increasing the productivity and competitiveness of the economy is the intensive adoption of digital technologies across production chains. The ongoing internet revolution, and more recently, the evolutions in artificial intelligence (AI), are reshaping traditional production models. As the Draghi Report points out, digital transformation explains much of the United States' faster growth than Europe. According to the IMF, AI adoption in Brazil could boost GDP by 5% over the next decade, potentially reaching 8% if workers are adequately trained to leverage capabilities fully.

Brazil faces a pivotal moment in the race for technological advancement. AI can potentially transform various sectors of the economy, increasing efficiency and innovation. It is crucial to consider the risks of negative externalities associated with AI, such as the impact on the labor market, increased energy consumption, and the protection of personal data. Navigating these risks will ensure that AI's benefits are realized without exacerbating inequalities or compromising sustainability. Finding the right balance between data protection and value creation is essential for Brazil's digital future. While the country must integrate AI solutions into public administration and the economy, preventing the unauthorized commercialization and processing of Brazilians' sensitive information abroad is critical. In that regard, ensuring proper consent and robust safeguards is vital. Making technological tools available in the productive sector is insufficient if the benefits are externalized mainly, while the negative consequences, such as data misuse or economic imbalances, are left behind in Brazil.

In the second half of President Lula's government, new policies will focus on accelerating the integration of AI into productive processes. These efforts will be driven by initiatives like the ones outlined in the Ecological Transformation Plan, which aim to strengthen digital infrastructure, improve connectivity, expand data centers with advanced processing capabilities, and enhance digital skills across the workforce. Innovation will be further encouraged through mechanisms such as regulatory sandboxes.  At the same time, we are implementing instruments to ensure that large internet companies contribute to the country's development and mitigate the negative externalities of digitalization, including fair taxation. In that regard, we introduced a Legislative Provisional Measure — to be ratified in Congress— that implemented the OECD recommendations on Global Anti-Base Erosion Rules (Pillar 2).

The economic policies of the digital ecosystem are a cornerstone of Brazil's strategy for enhancing productivity and competitiveness. In this context, we understand regulation as establishing a fair and transparent framework in which companies operate, fostering competition while ensuring equitable rights and responsibilities among all participants. Rather than hindering the market, appropriate regulation consolidates and develops it. Public policies must also promote universal access to digital technologies, narrow the digital divide, and ensure that all segments of society, including SMEs, can benefit from emerging economic opportunities. Competition within the digital ecosystem is critical to ensuring that the advantages of digitalization are shared broadly rather than concentrated among a few dominant players.

To be effective, regulation must keep up with the fast pace of technological innovations, addressing issues such as data protection, cybersecurity, and ethical AI use. Public policies should promote universal access to digital technologies, narrowing the digital divide and ensuring that all segments of society can benefit from emerging economic opportunities. Competition within the digital ecosystem is critical to ensuring that the benefits of digitalization are shared among all actors. Brazil is closely monitoring the world's most relevant legal and regulatory developments, particularly the implementation of the Digital Markets Act in Europe (along with other new regulatory frameworks) and the legal cases pushed by the Federal Trade Commission and the Department of Justice in the United States. The monopolization of digital markets leads to higher costs for consumers and businesses, ultimately undermining competitiveness. To counter this, Brazil will strengthen its antitrust institutions and update its regulatory frameworks to reflect the fast-evolving dynamics of the global digital economy while seeking cooperation with international actors.

In the same way that President Lula stressed the need to introduce reforms in the governance of the United Nations, the Global South must have an active voice in the debate on a new economic and technological order, which combines growth, innovation, and redistribution, while respecting the environment and workers' rights. This is what Brazil has proposed from the Presidency of the G20, including the discussion of a new fiscal compact that is fairer, progressive, and responsible. Brazil is committed to a future where economic advancement and social equality go hand in hand.