According to experienced analysts, the consecutive positive results verified in the economy cannot be maintained. They are the result of increased government spending and will not be sustained by new revenues. For the experts, in the medium term, there will be a drop in economic activity at the same time that the country will need to live with high interest rates, pressured by state expenses.
This Content Is Only For Subscribers
To unlock this content, subscribe to INTERLIRA Reports.
GDP Growth
In the beginning of September, the Brazilian Institute of Geography and Statistics announced that Brazil’s Gross Domestic Product (GDP) grew by 0.9% in the second quarter of this year compared to the previous three months. Even though the information is positive, for the analysts, it sounds an alarm due to the origins of this growth, which would not be driven by private spending, but public.
Spending Growth
The federal government’s aggregate costs grew by R$84.78 billion in the first half of the year compared to the same period in 2022, an increase of 6.6% in nominal terms. The number represents a real growth in these expenses, as the Broad Consumer Price Index (IPCA) was 5.89% between July 2022 and June 2023.
New Conflict with the Central Bank
Since the beginning of the year, President Lula and the Central Bank President, Roberto Campos Neto, had clashes over the country’s basic interest rate (Selic). While Lula wanted it to be lowered – at that time Brazil had the highest real rate in the world –, Campos Neto stated that it could not be done, to control inflation. For the analysts, since the growth will not last, the conflict between the Lula government and the BC over the drop in interest rates will resurface as activity slows down.
Not Enough Revenue
Critics do not believe that the government will be able to solve this issue by creating new sources of revenue. However, politicians hope to solve the issue with a few new projects, like a change in taxation of super funds, or exclusive funds, which is expected to generate a return of approximately R$ 10 billion, according to average market estimates.
Another way to increase revenue would be through a project already under analysis in Congress. The Chamber of Deputies approved on Wednesday (13/09) the bill that regulates betting sports in the country, as well as other online games, such as virtual casinos. The proposal will tax company revenues, winners’ prizes and institute an initial grant to authorize sites operating legally. Project was approved by symbolic vote and goes to Senate analysis. The tax charged on revenue from sites will be 18%. The initial grant for authorization to operate the sites will be R$30 million.
Pressure for More Spending
Finance Minister Fernando Haddad admitted that there is spending pressure from many areas, but he considered it part of his job to locate the risks. The statement was made on Wednesday (13/09) night, during an event with journalists.
Analysis:
Government and institutional stability in Brazil depends deeply on the economic progress. Lula’s third mandate, which faces strong opposition, particularly in the Federal Chamber and in some sectors of society (agribusiness, financial market, military, middle class etc.), could be hampered if it does not present reasonable economic results. For the moment, the GDP results have strengthened the central authorities, but the growth of government debts and difficulties approving measures that could expand revenue to respond to this debt growth could create serious obstacles. This is particularly concerning in the case of Lula, due to a history of increasing expenses.
Source: Folha de SP, CNN, BBC, Valor.
