Alarming IMF forecast for Brazil: from surplus to fiscal deficit by 2023, which could reach up to 9% of GDP

Despite Finance Minister Haddad’s promises, the International Monetary Fund (IMF) estimated that Brazil’s public finances would be derailed by the new measures of Lula’s government.

The deficit would reach the highest value in the last six years, and the primary surplus inherited from the previous administration would be lost entirely.

In less than four months in office, President Lula da Silva changed Brazil’s outlook negatively.

The fiscal program of the ruling party focused on a large expansion of expenditures programmed for the end of the year, lifting the spending cap planned by Temer since 2016 and expanding budgeted expenditures by R$198 billion and without any counterpart in new revenues.

Finance Minister Fernando Haddad announced that the government is seeking a fiscal target of 0.5% to 1% of GDP for the 2023 primary deficit (having inherited a surplus of 0.6% from the Bolsonaro administration).

In addition, as of 2024, a new fiscal rule would come into effect whereby public spending will be capped at 70% growth of what tax revenue increases.

However, regarding 2023, the fiscal outlook is increasingly negative because the government does not take compensatory measures for the fiscal waste it produces.

The IMF once again revised downward the outlook for the Brazilian economy and now estimates that the primary deficit will reach 1.95% of GDP in 2023 (exceeding Minister Haddad’s target), and the total financial deficit will reach 8.8% of GDP.

If these results materialize, Brazil will record the largest fiscal imbalances in the last six years considering the federal government sphere (excluding the results of local states and municipalities).

This implies higher borrowing costs and systematically deteriorating monetary policy expectations.

FISCAL DEFICIT OF THE FEDERAL GOVERNMENT BETWEEN 2009 AND 2023

Only after 2024 does the IMF project a gradual fiscal consolidation, which is insufficient to regain discipline.

Estimates suggest that Brazil would take five years to recover from the irresponsible fiscal shock in 2023, both in terms of the primary deficit and the financial outcome.

If the non-monetary financing of the “transition” to fiscal order proposed by Haddad’s new rule does not become credible, in practice, the effect of the Central Bank’s monetary policy (even if independent) could be attenuated.

However, President Lula is not discreet in noting his displeasure with the Autonomy Law of the monetary authority established by his predecessor.

The results published by the Central Bank of Brazil reveal a deterioration in public finances in the first 60 days of the new government’s administration.

The federal primary surplus (without the BCB result) decreased from 0.56% of GDP in December last year to 0.37% in February 2023, while the fiscal deficit rose from 4.35% to 4.55% of GDP in the same period.

These results correspond to the newly approved expenditures, the postponement of the fuel tax relief for two months, and the revaluation of the non-taxable minimum for individual income tax, among other measures.

If the balance of the local States is added, Brazil’s fiscal deficit reached 5.62% of GDP in February, the highest value since August 2021.

With information from La Derecha Diario

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