Brazil’s 2021 budget: can the belt get any tighter?

. Aug 19, 2020
2021 budget brazil Image: Wael Khalill Alfuzai/Shutterstock and André Chiavassa/TBR

The Jair Bolsonaro administration is expected to present its 2021 budget proposal to Congress by the end of August. After the major increase in public spending and plunge in economic activity due to the Covid-19 pandemic, there are more pressing needs on the government’s plate than there are resources available to fulfill them. With behind-the-scenes squabbles underway in Congress over next year’s budget, early drafts suggest that education and health will lose out, while defense is set to be the big winner.

The budget plan obtained by O Estado de S.Paulo newspaper shows that the Defense Ministry is expected to have a 48.8 percent increase in its budget, reaching BRL 108.56 billion in 2020. If confirmed, that would top the BRL 102.9 billion earmarked for the Education Ministry — being the first time Defense received more money than the education system in a decade.

</p> <p>The Health Ministry — with an increased <a href=",mesmo-com-pandemia-governo-planeja-cortar-orcamento-da-saude-para-2021,70003403060">budget</a> of BRL 174.84 billion in 2020 to fight off the pandemic — should be left with just BRL 127.75 billion to spend as of January 1, even with the risk of the coronavirus crisis running on into 2021.</p> <p>The report points out that the amounts suggested are preliminary figures and may be adjusted by the government until August 31, the deadline to deliver proposals to Congress.</p> <h2>Budget constraints</h2> <p>The room to grow the federal budget is limited by Brazil&#8217;s forced spending cap, a fiscal rule that means increases in government expenses and investments are restricted to the rate of inflation. When 2020’s budget was approved, the consumer inflation index was expected to reach 3.53 percent; in the 12 months ended in July, it reached 2.31 percent, according to national statistics bureau IBGE.</p> <p>As we reported in our <a href="">August 10 story</a>, there is mounting pressure to ignore the spending ceiling rule — an impeachable offense — inside and outside the government, which would be a clear change from the Economy Ministry&#8217;s reformist liberal agenda. Factions of the administration are pushing for a breach in fiscal rules in order to progress infrastructure investments which, as reporter José Roberto Castro explained, could facilitate President Bolsonaro’s reelection in 2022.&nbsp;&nbsp;</p> <p>The government is now looking for alternatives to increase spending without bursting through the federal ceiling. Among them, emergency budget credits are being analyzed, especially <a href=",exclusivo-maia-diz-que-mp-de-credito-extra-para-obras-e-inconstitucional,70003398766">a BRL 5 billion grant for infrastructure projects</a> that could reactivate the economy.</p> <p>However, these are exceptional credits released to cover unexpected expenses, in public calamity situations such as wars or pandemics. It is also true that, in recent years, such credits have also been used for non-emergency needs.&nbsp;</p> <p>Plus, strategies such as including Bolsa Família beneficiaries in the government&#8217;s emergency coronavirus salary program — paid for through emergency credits permitted by the so-called “<a href="">War Budget</a>” — left the BRL 29.5 billion previously directed to the cash transfer program free for allocation.</p> <p>Another pressing issue is that, besides dealing with regular budgetary needs in 2021, Brazil will be faced with an enormous Covid-19 bill to be paid. According to the latest <a href="">bulletin</a> by the Economic Policy Department of the Health Ministry, BRL 505.4 billion has been spent on the Covid-19 fight — 7.3 percent of the expected GDP for 2020. This will push the federal government&#8217;s primary deficit to a record BRL 800 billion, an astonishing 11 percent of forecasted GDP for the year.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3510748"><script src=""></script></div> <h2>Shockwaves through the market</h2> <p>As we <a href="">mentioned</a> in our August 18 Daily Briefing, the tug-of-war concerning the budget is causing volatility in markets, as investors fear Economy Minister Paulo Guedes could protest calls to increase spending and resign. Among the financial class, Mr. Guedes&#8217; liberal agenda is seen as a cornerstone of the government, and rumors of his departure caused benchmark stock index Ibovespa to plunge on Monday.</p> <p>Both Mr. Guedes and President Bolsonaro moved to extinguish the flames: the former reaffirmed his trust in the president and the latter assured Mr. Guedes would stay put. The remarks propelled Ibovespa’s 2-percent jump on Tuesday, also helped by the strong performance of retail stocks, rising above 100,000 base points.</p> <p>But the real problem, as O Globo newspaper <a href=";utm_medium=email">reports</a>, lies in public bonds and the management of sovereign debt. As the fiscal situation worsens, investors are demanding higher premiums for Brazilian bonds, forcing the National Treasury to issue bonds with a shorter expiration date.&nbsp;</p> <p>As a result, internal debt increased to BRL 4.15 trillion in July 2020, with an average of 3.6 years to pay. One year before, Brazil had an average of 4.06 years to repay debt of BRL 3.82 trillion.&nbsp;</p> <p>It is important to remember that Brazil is currently living in an environment of low inflation and interest rates, which helps hold debt down. However, in the market, the spread in the bond’s yield curve is widening significantly: while bonds due January 2021 offer a 1.8 percent yield, those that mature in January 2030 charge a 7.5 percent yield.&nbsp;</p> <p>Naturally, long-term bonds demand higher premiums than short-term maturities, but such a distance in yields suggests expectations of steep hikes in interest rates — and, therefore, a higher public debt in the future.

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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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