2026 - Edition 104 | August 25

High public debt, high interest rates and inflation reduce the space for policies capable of expanding opportunities and social mobility

Olá Leitor,

When talking about balancing public accounts, it is common for the debate to be immediately associated with topics such as public debt, primary result, interest rates, or investor confidence. These are, without a doubt, important economic issues. But there is a less evident — and perhaps even more relevant — dimension that needs to be incorporated into this discussion: that fiscal balance is also a social issue.

A country that has lived for a long time with expenses higher than its revenues needs to finance this difference. It does this by issuing debt. The debt grows, government need for financing increases, and the risk perception of those who finance the State also grows.

The greater the perceived risk, the higher the remuneration demanded by the buyers of government bonds. And higher interest rates produce a known consequence: they increase the interest expense itself, making it even more difficult to stabilize the debt.

But the problem does not end with government accounts. When the expansion of demand driven by a very active fiscal policy is not accompanied by growth of the productive capacity of the economy, inflationary pressures also arise. And inflation is far from being a socially neutral phenomenon.

Inflation erodes purchasing power, particularly of lower-income individuals. High interest rates, in turn, make credit more expensive, reduce investments, hinder the expansion of companies and the generation of jobs. The rise in interest rates makes new investment projects unfeasible and this compromises the expansion of productivity and, consequently, compresses the possibility of expanding labor income, thus limiting the possibilities of social mobility. In summary, contrary to what is preached, fiscal irresponsibility generates inequality and low social mobility.

There is yet another consequence that is perhaps less noticeable. Each real (R$) destined for the payment of interest on the debt is a real that is no longer available for other public purposes. In a budget marked by high rigidity, the increase in financial expenditure further reduces the space available for investments and public policies. Education, early childhood, infrastructure, sanitation, professional qualification, and policies aimed at productive inclusion are now competing for an increasingly smaller share of public resources.

This is precisely where public debt and social mobility meet.

Brazil continues to be a country in which the conditions of birth exert an enormous influence on future opportunities. The IMDS Atlas of Social Mobility shows that, among individuals born between 1983 and 1990, only 8.3% of the children of families located in the poorest 25% manage to reach, in adult life, the group of the richest 25%. Among the children of the richest 25%, 56.5% remain in this group. The chance of reaching the richest quarter of the population is almost seven times greater for those born among the richest than for those born among the poorest.

Breaking this persistence requires quality public policies, but it also requires economic growth, investment and the generation of good jobs. As we have highlighted in the last Letters, education is probably the most powerful individual instrument of social mobility. But it is not enough to train more educated individuals if the economy is not able to offer productive opportunities for them to transform knowledge and qualification into income and improvement of living conditions. In this sense, fiscal responsibility, economic growth and social mobility are part of the same agenda.

There is no contradiction between fiscal responsibility and social responsibility. On the contrary: a sustainable social policy presupposes a State financially capable of financing it. The greater the share of public resources committed to debt service, the smaller the space tends to be for investments and policies capable of structurally modifying the opportunities of those born into the poorest families.

Today's young people may well be receiving an inheritance not only of higher debt, but an economy with higher interest rates, less capacity for public investment, lower growth and a State with fewer instruments to promote equal opportunities.

Fiscal balance, therefore, should not be understood as merely an accounting objective. Nor does it mean advocating that the State stop spending or abandon social protection policies. It means recognizing that public resources are limited and that choices made today condition what we can do tomorrow.

Ensuring the balance of public accounts is preserving the State's ability to choose its priorities.

If we want a country in which family origin determines less and less the destiny of each individual, we need good social policies. But we also need growth, investment, economic stability and sustainable public accounts.

See you in the next "IMDS Letter"!

Paulo Tafner
CEO