BrasiliaThe increase in spending promoted by the government of Luiz Inácio Lula da Silva (PT) and the higher level of interest rates in the domestic economy and in the international scenario have placed the so-called nominal deficit on a path of deterioration.
The indicator, which reflects the balance between revenues, expenses, and the cost of public debt interest, reached 9.41% of GDP (Gross Domestic Product) for the consolidated public sector in the accumulated 12 months until April.
It is the highest level since January 2021 when the state of the accounts still reflected the impacts of the Covid-19 pandemic.Despite the parallels, the composition of these results is different.
If during the pandemic the leap in spending to combat the effects of the health emergency was the main driver of fiscal deterioration, now it is the interest bill that weighs most heavily on the situation of Brazilian finances.
In absolute terms, the nominal deficit reached R$1.066 trillion in the 12 months until April, of which R$792.3 billion (or 74%) are public debt interest.
The data are disclosed by the Central Bank and have been updated by XP Investimentos to account for the effects of inflation.Another R$274.1 billion comes from the primary deficit (which excludes the interest bill and more directly indicates the balance between revenues and expenses with public policies).
Government technicians point out that the value includes the payment of court orders (judicial sentences) that had been postponed by the government of former President Jair Bolsonaro (PL).
Therefore, in the view of these insiders, comparisons with the situation during the pandemic must be made with caution.
The Selic rate is currently at 10.5% per year, resulting from a downward cycle that started in August 2023 when the basic interest rate was at 13.75% per year to assist the Central Bank in combating inflation.
During the pandemic, the unprecedented volume of spending was offset by negative real interest rates (with the Selic reaching a historical low of 2%).In January 2021, when the nominal deficit reached the peak of R$1.308 trillion, the interest bill totaled R$402.8 billion (30% of the total), in already adjusted values.
The numbers for the consolidated public sector include the federal government, states, municipalities, and their state-owned enterprises (except for Petrobras and Eletrobras groups).According to the National Treasury, 45% of Brazil’s internal debt, denominated in reais, is linked to the Selic rate.
Therefore, any fluctuation in the rate automatically impacts the government’s interest bill.However, this is not the only factor affecting the results.
The international scenario of higher interest rates ends up pushing up all the rates charged by investors to finance Brazil through the purchase of government bonds, including those with medium and long maturities.
At the same time, it may limit the short-term reduction of the Selic rate.Costs are amplified by the uncertainties surrounding the country’s fiscal trajectory, which add a risk premium to the rates paid by the Brazilian government.
Minister Fernando Haddad (Finance) advocates for harmonization between fiscal and monetary policies and has even stated that the high interest rates practiced by the Central Bank contribute to the increase in debt.
The Central Bank lists fiscal uncertainty as one of the reasons for adopting a more conservative position in conducting interest rate policy.”
It is the primary deficit that raises the cost of financing [via interest rates] or is it the nominal deficit that ends up weighing on sustainability? It is the question of what comes first,” says XP economist Tiago Sbardelotto.
He believes that fiscal uncertainty is a significant pressure factor and should affect the interest bill even if the Central Bank continues to cut rates.
“If there is no certainty that [the government] will be able to deliver the promised fiscal results, agents will charge more.
The cost of debt is linked to higher fiscal risk. [Cutting the Selic rate] would not be enough to reduce the cost of debt,” he warns.In his view, the government should act to strengthen the fiscal framework and ensure its sustainability in the future.
Currently, the growth of mandatory expenses such as pension benefits and minimum spending on Health and Education raise doubts about the capacity to accommodate such expenses within the spending limits.
Economist Cláudio Hamilton, Coordinator of Public Finance at Ipea (Institute of Applied Economic Research), says that the issue of the nominal deficit is concerning, but there is a tendency for reduction ahead, both in interest rates and in the primary deficit.
“The situation has deteriorated a lot in the last 12 months for a series of reasons. The year 2023 was about fixing public accounts, the primary deficit increased significantly [after the approved spending increase during the government transition].
On the other hand, there was an acceleration of interest rates that are now falling, but slowly, and they remain very high compared to inflation,” he assesses.In his opinion, there are “good technical arguments” to continue reducing the interest rate, as the improvement in the labor market did not generate an inflation spike.
However, he recognizes the fiscal uncertainty.”It’s not like the government is winning in the National Congress. And you have to see how the Rio Grande do Sul account will end up, it’s an important negative shock.
The pressure for more spending continues,” says Hamilton. According to him, a greater effort from the government could pave the way for a faster interest rate reduction.
Rafaela Vitoria, Chief Economist at Banco Inter, states that the increase in interest expenses was expected, especially given the postponement of expectations for interest rate cuts in the United States.
On the other hand, the deteriorating trend raises an alert about fiscal policy.”The nominal deficit is a consequence of an fiscal adjustment that has not been made.
A year after the framework, we see a significant deterioration in expenses, and the primary deficit does not improve. I see a greater risk perception in the rates of the Treasury auctions,” she says.
She points out that, with a bill of R$100 billion in court orders for 2025, the result in next year’s accounts may be even worse than in 2024, although Haddad’s fiscal target predicts improvement-part of the expense of court decisions can be deducted from the calculation of the target and the framework limits, as authorized by the STF (Supreme Federal Court).
In her projections, the government is expected to have a primary deficit of R$77 billion in 2024 and R$78 billion in 2025.”It’s a paradox.
There are accounts that do not enter the target, so there is not the same control. Court orders are debts that must be paid, but there is a cost to staying out. You have to worry about all expenses,” she evaluates.
