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Montevideo, March 28th 2024 - 20:47 UTC

 

 

Lula's administration announces orthodox fiscal goals, to help combat inflation expectations

Thursday, April 6th 2023 - 14:21 UTC
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The fiscal framework proposed by Fernando Haddad combines a looser spending cap with primary budget targets. First reactions of markets have been positive The fiscal framework proposed by Fernando Haddad combines a looser spending cap with primary budget targets. First reactions of markets have been positive

The Brazilian administration of President Lula da Silva finally unveiled new fiscal rules to try and balance limits on spending growth, which have collided with promises of higher social programs, government investment, and independent central bank high-interest rates, all of which have created uncertainty about his commitment to combat inflation.

The proposal is key to easing fiscal concerns since Lula secured congressional approval to bypass a constitutional spending cap. Lula's electoral spending promises and criticism of the central bank have boosted inflation expectations.

The new fiscal framework proposed in the finance ministry presentation by Fernando Haddad combines a looser spending cap with primary budget targets. First reactions of markets have been positive as analysts greeted at least the long awaited announcement

Under the new rules public spending would be allowed to grow between 0.6% and 2.5% per year above inflation. Spending growth would also be limited to 70% of revenue growth in the prior 12 months.

The new proposal to be considered by Congress, would replace the constitutional prohibition on spending increases above inflation since 2017. Brazil has allowed repeated exceptions to that rule in recent years, undermining its credibility with investors.

The commitments to erase a budget deficit next year and deliver a primary surplus in 2024 are encouraging, said Todd Martinez, a director of sovereign analysis at Fitch Ratings.

“If that really happens, it's good news,” he said in an interview, adding that the credibility of those targets will depend on what policy measures will be taken to achieve them.

“Although the governments' forecasts are positive, they are also very optimistic and raise questions about execution,” wrote Rafaela Vitoria, chief economist at Banco Inter.

Haddad said the finance ministry had discussed the proposal with the central bank and other ministries, reaching “100% consensus” within the government after weeks of reported tensions inside the ruling Workers party and with some of Lula's advisors.

However in an peace signal to central bank President Roberto Campos Neto, Haddad told journalists at a news conference that Brazil would grow “only by harmonizing” fiscal and monetary policy“.

Lula has criticized Campos Neto repeatedly for the central bank keeping interest rates at a six-year high due to rising inflation expectations and doubts about fiscal policy.

In a separate news conference, Campos Neto told journalists he still had not seen the details of the new fiscal framework, but the early proposals he heard seemed ”quite reasonable.”

Apparently the new framework would also target zero primary deficit in 2024, followed by a primary surplus equal to 0.5% of GDP in 2025 and 1% of GDP in 2026. The primary budget target would have a margin of plus or minus 0.25 percentage point.

This year's primary deficit target, the first of the Lula administration, is estimated at 228.1 billion reais (US$44 billion). Nevertheless, the finance ministry said it will seek a primary deficit equal to 0.5% of GDP, following its recent estimation that the shortfall would be 107.6 billion reais, equal to 1.0% of GDP, helped by a jump in expected tax revenue.

In a similar manner the new fiscal rules should help to stabilize gross public debt around 76% of GDP in 2026, compared with 73% in January, said Treasury Secretary Rogerio Ceron.

Categories: Economy, Politics, Brazil.

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