Public spending rises five times more than GDP and threatens inflation and interest rates

Public administration consumption expenditure, also known as government spending, increased five times more than GDP from the second to the third quarter, according to IBGE. They grew by 0.5%, while wealth generation varied by just 0.1%.

President Luiz Inácio Lula da Silva (PT) shows a tendency to maintain this accelerated pace in public spending, influenced, in part, by the proximity of the 2024 municipal elections. The PT, his party, is putting intense pressure on the government to abandon the fiscal target of zero deficit and be “free” to sharply increase spending in the election year.

The MUFG Brasil bank warns that the electoral process could intensify the pressure for higher expenses, threatening fiscal stability and, consequently, resulting in a weaker real. Currency devaluation affects inflation, since most commodities are priced in dollars.

The XP Investimentos analysis team also remembers that fiscal imbalances put pressure on inflation expectations. “Thus, it is likely that the IPCA (official inflation) forecasts in the medium term (2025 and 2026) will remain above the 3.0% target. The Central Bank will be willing to slow down and eventually interrupt the monetary easing cycle if the Is the inflation target at risk? Probably yes, even considering that the pressure on the Copom could increase over the next year.”

Government intentions arrive amid weakened public accounts

The government’s intentions come at an unfavorable time, with public debt reaching 74.7% of GDP in October, the highest value in 12 months, according to the Central Bank. The primary result, excluding interest expenses, went from a surplus of 1.78% of GDP in October 2022 to a deficit of 1.08% of GDP in the same month of this year.

The senior economist at Julius Baer Brasil bank, Gabriel Fongaro, states that fiscal risk has been increasing given the prospect of maintaining primary deficits in the coming years and the loss of credibility of the fiscal framework. “Fiscal risk is responsible, at least in part, for the current unanchoring of inflation expectations,” he says.

Market projects greater growth in public spending

Expectations for growth in public administration consumption expenditure have been gaining strength. Central Bank data shows that growth expectations for 2023 were 1.2% on July 3, rising to 1.75% on December 8. A similar situation was observed in the projections for 2024, which went from 1.3% to 1.49%.

The financial market is attentive to developments and will closely examine the behavior of the President of the Republic. He and the PT exert pressure on the economic team to maintain the dynamism of the economy.

Warnings regarding the fiscal situation have also been made successively by the Monetary Policy Committee (Copom) in its post-meeting statements and minutes. The latest statement, released on the 13th, highlights that “taking into account the importance of implementing fiscal targets for anchoring inflation expectations and, consequently, for the conduct of monetary policy, the Committee reaffirms the importance of firmly pursuing these targets “.

The market projects that the basic interest rate should end 2024 at 9.25% per year, rising from the current 11.75%. That would mean three more half-percentage-point cuts if the committee maintains its current strategy.

Pressure from the PT’s political wing is great

The pressure from the PT’s political wing for more public spending is great and has the support of President Lula. He said, on the 12th, during a Council meeting, that, if necessary, he could increase public debt to facilitate investments and the country’s growth. “It’s a political decision, it’s not a market decision,” he said.

PT leaders have been expressing, in recent days, their intention to open the taps of public coffers even further. In addition to the 2024 elections, the objective is to facilitate the construction of a project that guarantees the party at least 20 years in power, according to the party’s president, deputy Gleisi Hoffmann (PR).

One of the statements came from the government leader in the Chamber, deputy José Guimarães (PT-CE), for whom a deficit in public accounts may be necessary to win the 2024 elections.

Document approved by the PT National Directory, on the 8th, defends the need for Brazil to “urgently free itself from the dictatorship of the independent Central Bank and ‘fiscal austericide'”, so that the government can increase public spending and supposedly “give more dynamism to the country’s economy”.

The thesis was reaffirmed by Gleisi during the party’s electoral conference for 2024, on the 9th. She defended a deficit of up to 2% in GDP to “not let the economy slow down”.

Criticism of the Central Bank returns to the surface

The pressure on the president of the Central Bank, Roberto Campos Neto, which had reduced in recent weeks, increased again.

On the 12th, alongside governors and before the Copom decision that lowered the Selic rate to 11.75% per year, Lula said that it is necessary to stir the heart of the BC president to accelerate the reduction of interest rates.

The following day, it was the PT president’s turn to echo the criticism. According to her, Campos Neto was the one who most harmed Brazil in 2023, by allowing the Copom to adopt a “dropper” pace in cutting the Selic rate. The agency’s decision resulted in the fourth consecutive drop since August, taking it to 11.75% per year.

Criticism of the BC expresses a contradiction between Lula and the PT, as pressure on public spending is a factor that inhibits reductions in interest rates.

When they advocate that an already deficit government increase expenses and increase the deficit, the president and his party signal to the market a lack of commitment to rebalancing public accounts.

If a debtor – in this case, the government – ​​indicates that it does not mind owing more and more, the investors who finance it start to charge more to continue lending money.

As a result, the so-called “future interest rates” rise regardless of the Central Bank’s actions, making credit more expensive. At the same time, the BC itself is discouraged from promoting stronger cuts in the short-term rate, the Selic.