Opinion: Brazil’s Busted Budget

Opinion, by Michael Royster

RIO DE JANEIRO, BRAZIL – The government has just submitted to Congress its proposed Budget for 2016, together with the obligatory four year plan through 2019. The plan presumes a growth rate of 0.2 percent in 2016, together with inflation of 5.4 percent; in 2015, growth was -1,8 percent and inflation 9.2 percent.

These estimates are uniformly diagnosed by the market as unreal. Almost everyone expects a retraction in 2016, not growth; pessimists have begun to worry about 2017. Given the additional fact that the 2016 budget forecasts a primary deficit of R$30 billion, it is highly likely that international observers will decide that Brazil is no longer an “investment grade” country.

That will cause Brazilian borrowers to pay higher interest on foreign borrowings, and cause the exchange rate to fall even further. In short, the deficit is likely to increase, not decrease.

Dilma has called upon Congress to find ways to improve her budget so as to avoid the deficit. Congress has already proclaimed it’s not going to raise taxes, and it’s already passed several inflationary measures, involving long-entrenched interests such as retirement and social security benefits. If Dilma vetos these, Congress will override her veto.

In the face of this, Dilma has decided to hand over Brazil’s economy to her most trusted advisors: Planning Minister Nelson Cardoso and Chief of Staff Aluisio Mercadante, both of whom belong to the “developmentalist” school of economics, as does Dilma herself. They eschew austerity and believe you can cure almost any problem by throwing money at it.

Finance Minister Levy has been sabotaged and sidelined; Central Bank President Tombini, who has raised borrowing rates, has threatened to resign. In other words, there’s no one left in power who favors austerity measures. Without those measures, the 2016 budget will be busted many times over.

The Curmudgeon remembers his Vergil: “timeo Danaos et dona ferentes” or “I fear the Greeks, even bearing gifts.”