Brazil’s fiscal prospects to remain bleak through 2023

For much of the end of 2021, markets showed great concern with Brazil’s fiscal balance. The main reason for this distress came in the shape of a constitutional amendment bill allowing the federal government to cap its court-ordered debt repayments (precatórios) for this year, freeing up space on the budget and essentially making a mockery of Brazil’s federal spending cap.

While seeking assurances that the precatórios bill was a one-off, the markets’ worry is that the measure sets a dangerous precedent and renders spending cap rules useless.

On the one hand, Economy Minister Paulo Guedes continues to tell investors that there is nothing to worry regarding Brazil’s fiscal prospects. But experts say that the sustainability of public accounts will remain a hot-button issue throughout the year — at least until it becomes clear who will win the presidential election in October.

At an event held by Eurasia in mid-December, Mr. Guedes claimed that “no other country in the world has a fiscal policy as constricted as Brazil’s.” He added that the country’s primary deficit projection for 2021 is 1 percent of GDP, after having hit 10.5 percent during the first year of the pandemic. The head of the Economy Ministry announced that projections for 2022 were better still: 0.5 percent of GDP.

Mr. Guedes claims that the current government will be “the first to end up spending less than when [it] took office.” According to his data, government expenditures made up 19.5 percent of GDP in the first year of the Jair Bolsonaro administration and are expected to fall to 18.5 percent in 2022. In addition, gross debt is also expected to drop to...