Economy

Brazil faces $7 billion hole in 2021 budget from emergency aid, inflation

The emergency aid payments being held over to next year and welfare benefits indexed to a higher inflation rate than anticipated will cause the hole in 2021 budget, a source on the government's economy team told Reuters

Photo: REUTERS/Ricardo Moraes
  • The actual figure has not been determined yet because this year’s emergency expenditures to tackle the COVID-19 have not been fully tallied;
  • A BRL 35 billion hole in next year’s budget would require spending cuts in other areas of the same amount for the cap rule to be met.

Brazil faces a BRL 35 billion ($7 billion) hole in its 2021 budget due to emergency aid payments being held over to next year and welfare benefits indexed to a higher inflation rate than anticipated, a source on the government’s economy team told Reuters.

The actual figure has not been determined yet because this year’s emergency expenditures to tackle the COVID-19 crisis have not been fully tallied. But it will put additional pressure on an already critical fiscal situation, according to the source, who asked not to be identified because the projection has not been made public.

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Brazil’s government will already chalk up a record budget deficit this year excluding interest payments of BRL 844.3 billion, worth 11.7% of gross domestic product, according to its latest forecast.

Most of that is income transfers to millions of Brazil’s poorest families. The government insists it will end the transfers later this month and begin getting public finances back on track next year, keeping its spending cap rule intact.

A BRL 35 billion hole in next year’s budget would require spending cuts in other areas of the same amount for the cap rule to be met. The rule limits growth in public spending to the previous year’s rate of inflation.

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The 2021 Annual Budget Law forecast discretionary spending of about BRL 100 billion. Any reduction to that could pose a serious threat to some government departments and public services.

The Independent Fiscal Institute, a bipartisan Senate office that aims at transparency in government accounts, estimates BRL 90 billion of discretionary expenditure is needed to keep the public sector machine functioning properly.

The government’s draft 2021 budget in August forecast the 2020 INPC rate of inflation at 2.09%, to which benefit payments next year will be indexed. But last month that estimate jumped to 4.10%.

The economy ministry estimates that every 0.1 percentage point rise in the INPC increases total net expenditure by BRL 721 million. An annual INPC rate of 4.1% would imply BRL 14.5 billion of additional spending in the 2021 budget.

Figures this week showed that the INPC rate of inflation rose to 5.2% in November, which would lift benefit spending next year by around BRL 22.4 billion.

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