Despite improvement, Brazil far from going back to black

. Dec 21, 2019
Brazil has approved the first federal budget under Jair Bolsonaro, predicting the smallest deficit since 2016. Things are improving, but there is much to be done before public accounts returning to the black Photo: Eames Bot/Shutterstock

Brazil’s Congress approved the federal budget for 2020, the first proposed by the Jair Bolsonaro administration. The forecast indicates gradual improvement to Brazil’s public accounts, with a fiscal target of a BRL 124.1 billion deficit being the lowest since 2016. However, it still means the Brazilian government will remain in the red for the sixth year running, so perhaps there is less of a reason to celebrate.

</p> <p><a href="">Revenue was pegged</a> at BRL 3.687 trillion, including BRL 7 billion in dividends from state-owned companies and the optimistic expectation of a GDP growth of 2.32 percent—above <a href="">market expectations</a> of 2.25 percent growth.&nbsp;</p> <p>However, almost all of that revenue has already been allocated. This year, lawmakers pushed through legislation to force the Executive to honor parliamentary grants on the federal budget, giving the government even less room to maneuver. According to the <a href="">Senate&#8217;s official news website</a>, BRL 9.4 billion in grants have been approved for next year and are non-negotiable. For comparison, non-mandatory expenses—such as investments—amount to only BRL 121.4 billion, just three percent of the total revenue forecast.</p> <div class="flourish-embed" data-src="visualisation/1116621"></div><script src=""></script> <h2>Not there yet</h2> <p>The budget issue is not entirely settled as far as the government is concerned, as it must request Congress approval to issue public bonds in order to fund regular expenses. This spending is expected to reach BRL 343.6 billion, against BRL 248.9 billion in 2019. Without it, the administration may breach the so-called &#8220;Golden Rule,&#8221; by which the government must not spend more than it raises. Violating the Golden Rule is an impeachable offense.</p> <p>Earlier this year, the federal government had to freeze various lines of public spending, especially related to education, as revenue projections were frustrated by poor economic growth, as opposed to the 2.5 percent GDP increase that propped up the 2019 budget. These funds were released at a later date thanks to one-off revenues, such as the proceeds of the pre-salt oil field auctions.</p> <p><a href="">As the Institute for Applied Economic Research (Ipea) highlights in a recent report</a>, “this release of funds in the final months of the year may lead to a backlog of pending primary expenses in 2020 that could reach BRL 200 billion, versus BRL 166 billion in 2019.” According to researchers, that could push 2019&#8217;s primary deficit to BRL 67.1 billion, or half of the government&#8217;s target.&nbsp;&nbsp;</p> <h2>Economic prospects</h2> <p>Other economic indexes are expected to behave well. Inflation measured by benchmark index IPCA is projected to reach 3.53 percent, while the benchmark interest rate is pegged at 4.4 percent,<a href=""> below its current 4.5 percent</a>. The Brazilian Real, however, is set for an average of BRL 4.00 to the U.S. Dollar, after the Brazilian currency reached record levels of devaluation earlier this year.</p> <p>The minimum wage, on the other hand, will increase to BRL 1,031, less than the initially expected sum of BRL 1,039. The increase, in comparison with the current minimum wage of BRL 998, is barely enough to cover the inflation rate over the last year, meaning there will be no real increase in salaries.</p> <h2>Controversy</h2> <p>With a few months left before the <a href="">municipal elections of 2020</a>, lawmakers from the Novo party presented a budget amendment to slash public funding for electoral campaigns to BRL 1.3 billion. However, this plea was overruled by 242 votes to 167. Parties will now have BRL 2 billion to spend on their campaigns, above the BRL 1.7 billion destined to the fund in 2018.</p> <p>This final amount is far smaller than the BRL 3.8 billion that party leaders initially wanted. Lawmakers settled for less after facing social media backlash from the electorate—which led President Bolsonaro to threaten to veto the electoral fund altogether.</p> <p>Jair Bolsonaro&#8217;s former party, the Social Liberal Party, and the center-left Workers&#8217; Party have the two largest caucuses in the House and will receive the largest chunk of electoral funding. The press have suggested this could be another reason for Mr. Bolsonaro&#8217;s veto threats.

Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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