Strong commodity prices and a recovering job market have helped a sharp improvement in Brazil‘s public finances, analysts say, allaying concerns about the country’s short-term fiscal health and helping to lure an influx of foreign investment.
But the impressive public-sector surplus is also providing fodder for presidential candidates on the left and right who want to overhaul fiscal rules after this October’s election.
Right-wing President Jair Bolsonaro and his main challenger, leftist former President Luiz Inacio Lula da Silva, have both blasted a constitutional spending cap that has been key to shoring up public finances since a deep 2015-2016 recession.
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Without that spending ceiling, which limits the growth of federal expenditures to keep pace with inflation, Brazil could soon start a new chapter in its economic telenovela.
“With the spending cap, it’s easy to predict how public debt will behave,” said Luciano Sobral, chief economist at Neo Investimentos. “But no one thinks it will survive next year with either Lula or Bolsonaro. We don’t know what will take its place.”
Federal government revenue soared 26% in the first quarter – nearly 15% above inflation – which helped to lift the public sector’s primary surplus to 1.4% of GDP in the 12 months through February, according to central bank data last week.
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Rather than celebrating the strong finances, Bolsonaro lashed out at rules keeping “excess revenue” beyond his reach.
“You can’t spend a penny of that on infrastructure because of the spending cap,” Bolsonaro said in a radio interview last month. “A lot of people say this is something that needs to be changed … We will discuss this issue after the election.”
His rival Lula, who is leading in the polls, has also made no secret of his plan to scrap the spending cap, saying his priority is poverty reduction rather than fiscal targets.
Investors have been sanguine so far about the shifting policy winds, flocking to Latin America‘s largest economy as a relatively safe bet amid the war in Ukraine and fresh wave of COVID-19 rattling China.
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Net portfolio inflows to Brazil totaled $5 billion in the first three months of this year, helping to strengthen Brazil’s currency almost 10% against the U.S. dollar in the year to date, even after a recent selloff.
Brazil‘s five-year experiment with a spending ceiling shows it has been key to an improving its fiscal position, said Rafaela Vitória, chief economist at Banco Inter.
She noted the country’s last bout of double-digit inflation, in late 2015, also pushed up government revenue – but spiraling expenditures erased those gains.
Government officials say Brazil has also done its homework with a labor reform and new rules for infrastructure investment boosting economic growth and helping to beat negative fiscal forecasts.
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Adolfo Sachsida, a special adviser to the economy minister, said private economists had underestimated government revenue for the past 20 months in a row by his count.
“The market is underestimating the strength of the microeconomic reforms that we have made,” he said. “Of course, we also have concerns, but I invite everyone to look at the numbers. The data are clear. Our fiscal improvement is not a matter of opinion,” he added.
But the data has done little to change the mind of Bolsonaro or Lula when it comes to Brazil‘s fiscal framework next year.