Persistent lack of fiscal control could lead Brazil to follow Argentina’s path

The government’s carelessness with public accounts, with President Luiz Inácio Lula da Silva’s (PT) known tolerance for fiscal deficits and the consequent increase in public debt, could have a heavy cost for the Brazilian economy in the long term, liberal analysts say.

“Just look at Argentina and what the ideology of ‘spending [público] is life’ caused in that country”, says professor Cláudio Shikida, from Ibmec Belo Horizonte and specialist at the Millenium Institute. The expression “spending is life” is attributed to Dilma Rousseff, then chief minister of the Civil House, when in 2005 she rejected a zero nominal deficit proposal studied by the Ministry of Finance, at the time under the command of Antonio Palocci.

Projections from banks, consultancies and brokers point to primary deficits (expenses exceeding revenues, not counting interest on debt) and an increase in public debt at least until 2027.

Even though most analysts do not classify this scenario as catastrophic and demonstrate a certain condescension towards the government’s fiscal management, the outlook tends to become more complicated if there are no clear signs of a reversal of this trend.

The worsening of public accounts since the beginning of Lula’s current term is undeniable.

In 2022, the public sector had a primary surplus of R$126 billion – with the help, it is worth mentioning, of dividends from state-owned companies, postponement of payment of court orders and the effect of inflation on revenue. As interest expenses totaled R$586.4 billion, the country ended the year with a nominal deficit of R$460.4 billion.

Just over a year later, the country recorded, in January 2024, a primary deficit of R$246 billion. The government attributes a large part of this value to the settlement of court orders held in the previous administration and the payment of compensation to states and municipalities; Even so, the Ministry of Finance admits that there would be a deficit of more than R$100 billion without these events.

Interest spending in 12 months, meanwhile, reached a record: almost R$746 billion. Combining the primary deficit with debt interest, the nominal deficit rose to R$990 billion – just slightly below the peaks reached during the pandemic.

Result: public sector gross debt went from 71.4% of GDP at the end of 2022 to 75% of GDP in the first month of 2024.

Despite this, the news of an increase in federal revenue in January was enough for Lula to defend an increase in the fiscal framework’s spending limit – which barely came into force. Detail: while the Union’s net revenue grew 3% in real terms in the first month of the year, expenditure increased 6.8%. Almost double the speed, therefore.

Lack of fiscal control in Argentina resulted in more inflation and poverty

The policy of emphasis on public spending caused the Argentine primary deficit to jump from 0.4% of GDP in 2019 to 2.9% of GDP last year. It is a reflection of an older problem that gained traction during the Kirchner family’s stay in power, between 2003 and 2015.

The local currency, the Argentine peso, faced a strong devaluation from 2019 onwards, reflecting international distrust, with the official exchange rate going from 59.90 pesos per dollar at the end of that year to 865 last Friday (8). Inflation also accelerated, rising from 53.8% in 2019 to 211.4% last year.

Poverty in Argentina has grown, reaching 57.4% of the population, the highest rate in 20 years, according to the Social Debt Observatory of the Catholic University of Argentina (UCA). It increased most in the homes of workers or families not benefiting from social programs.

The neighboring country’s economy closed last year with a drop of 1.5% in GDP, according to Itaú estimates. For 2024, the projection indicates a further shrinkage, with a reduction in economic activity predicted at 2.5% and an increase in unemployment from 7% to 8.5%.

“People often don’t realize that the economic impact is necessarily social. If GDP does not grow and a recession enters, it is easy to see that there is no social aspect without the economic aspect”, highlights Shikida.

Difficulty rolling over public debt would be a harbinger of problems

Analysts point out that in Brazil, one of the first consequences of a greater lack of fiscal control may be the difficulty in rolling over public debt. This would affect the country’s credibility abroad, indicating increases in country risk and the exchange rate. One consequence of these increases would be pressure on inflation, as many commodities and goods are traded in dollars.

The president of the Liberal Institute of São Paulo (Ilisp), Marcelo Faria, states that the market would demand higher interest rates to roll over the debt, which would limit the private economy, increasing the cost of credit and not favoring employment and income generation. .

More expensive credit would also weigh on prices. Companies’ financing conditions would worsen, says Demostenes Jonatas, professor of applied economics at Faculdade Presbiteriana Mackenzie in Brasília. This would lead to higher production costs, reflected in the prices of goods and services.

“These are scenarios in which the poorest would be most impacted, due to the growth in unemployment and the loss of purchasing power. The richest would have the means to protect their money through financial investments”, says the Ilisp expert.

Analysts defend fiscal adjustment on the expenditure side

Analysts point out that, precisely because of these risks, it is necessary to invest a fiscal adjustment on the public expenditure side. But what the government tries to do is an adjustment only on the revenue side, sucking up resources that the private sector could apply to its activities.

“Without this review, in the long term there will be an increase in the tax burden and interest rates, which means less growth and fewer jobs”, highlights Faria.

One of the paths highlighted by Shikida is the need to review the fiscal framework. The expert says that it is not possible to increase tax revenue indefinitely without causing an economic slowdown.

“Empirical evidence shows us that adjustments made primarily with tax increases generate longer recessions than those that have spending cuts as their main tool. In this way, we are heading towards a dangerous situation if nothing is done”, he warns.

Even the strategy of fiscal adjustment via revenue has flaws: the Minister of Finance, Fernando Haddad, has not been able to obtain approval from Congress for all his revenue measures, which makes it even more difficult to eliminate the primary deficit.

Risk of interference in private companies is also a concern

The risk of interference in private companies is also a concern, with analysts warning of attempts to implement state steering in the economy, similar to what occurred in Argentina and Venezuela.

The government’s attempt at a more ‘directive’ stance was most evident in the government’s attempt to place former Finance Minister Guido Mantega as president of Vale, one of the largest Brazilian companies. He was responsible for economic policies that led to the 2015-6 recession.

This stance was also clear in President Lula’s statements, during an interview with RedeTV on the 27th. He explained his conviction that companies must follow the government’s guidance in their decisions. “The government wants to be the main actor in the economy”, highlights Faria.

Shikida adds, stating that the view that the economy should submit to the will of the state is an empty phrase and bears a dangerous similarity to fascist ideology. “Who is this ‘State’ whose desire is absolute?” he asks.