Brazil’s consolidated public sector recorded a primary deficit of R$21.4 billion in August 2024, reflecting ongoing fiscal challenges. This figure includes results from the central government, state and municipal governments, and state-owned companies. Concerns have emerged over budget inconsistencies and the potential failure to meet fiscal targets for 2024. Additionally, inflation has led to expectations of higher interest rates by November, while energy and service prices are also expected to rise due to seasonal and environmental factors, further impacting the economic outlook.
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Reflection of the Previous Month
Last month’s result reflected the central government’s deficit of R$22.3 billion. Regional governments and state-owned companies had surpluses of R$435 million and R$469 million, respectively. August’s performance is slightly better than that recorded in the same month of 2023 when there was a deficit of R$22.8 billion.
Year-to-date
From January to August, the consolidated public sector accumulated a deficit of R$86.22 billion, equivalent to 1.14% of the GDP (Gross Domestic Product). For 2024, the government of Luiz Inácio Lula da Silva (PT) is targeting a deficit of R$28.8 billion. This is the maximum limit allowed by the fiscal target’s tolerance margin, whose central target is zero.
Budget Inconsistencies and Fiscal Risk
Concerns are growing over inconsistencies in the government’s budget and its potential failure to meet fiscal targets for 2024. Analysts are skeptical about whether planned measures, such as tax hikes and benefit reviews, will generate the expected revenue. Sub-estimations in spending, particularly with pensions, are contributing to this fiscal uncertainty.
Inflation Increase
In its quarterly inflation report, released this Thursday (26), the Central Bank (BC) revised its growth projection for Brazil’s GDP this year from 2.3% to 3.2%, aligning with market expectations. According to the Focus survey, the economy is expected to expand by 3% in 2024. The BC anticipates a reduction in growth in the second half of 2024 and throughout 2025, due to lower fiscal stimulus, higher interest rates, idle production factors, and the absence of strong external demand.
Economic Outlook and Interest Rates
The Central Bank’s inflation forecasts indicate that inflation could remain higher than expected, which could lead to a possible interest rate hike in November. This expectation is based on the current fiscal risks and persistent inflationary pressures, which may also reduce future economic growth.
Price Changes
Below-average rainfall and higher temperatures have increased the likelihood of more restrictive tariffs by the end of the year, with a red flag on electricity bills in October and November. For gasoline, the Central Bank expects prices to moderate due to the drop in oil prices. Service prices, however, are expected to rise, particularly with seasonal increases in airfares, driven by summer travel demand.
Analysis:
The recent economic data, highlighting Brazil’s primary deficit of R$21.4 billion in August, reveals substantial fiscal challenges for the Lula government. These issues come at a critical juncture, as the administration seeks to balance fiscal responsibility with expansive social programs. The inconsistencies in budget projections and the difficulty of achieving revenue goals are raising concerns in the political arena, potentially straining Lula’s political capital.
The projected inflationary pressures and expected interest rate hikes by November also complicate Lula’s broader economic agenda. Inflation, combined with seasonal price increases in essential services such as electricity and airfares, may negatively impact public sentiment, especially among the lower-income segments that form a significant part of Lula’s voter base. Moreover, the focus on inflation control and fiscal targets might limit the government’s capacity to introduce significant new social spending. These economic challenges could test the government’s political alliances, especially in Congress, where budgetary decisions and reforms are being negotiated.
In this context, Lula will have to carefully navigate fiscal austerity while attempting to meet the social demands of his supporters, all while maintaining a coalition that can support his policies.
