Discretionary Fiscal Behavior, Spending Ceiling Rule and Public Debt Sustainability: Analyzing a Large Emerging Economy

This paper examines whether the nominal fiscal stance in Brazil, from March 2016 to March 2026, is consistent with long-run public debt sustainability. Employing an innovative method to isolate the structural discretionary fiscal component via a dynamic specification and structural VAR models, we reveal a stark institutional asymmetry. While the full sample exhibits a strong pro-cyclical fiscal bias, the Spending Ceiling regime successfully enforced a sharp, counter-cyclical retrenchment, proving effective in anchoring long-term public debt stability. The obtained evidence suggests the effectiveness of strict and legal fiscal rules as a mechanism to curb public indebtedness in emerging economies.