Why Brazil’s enhanced Family Grant threatens the spending cap

RIO DE JANEIRO, BRAZIL – President Jair Bolsonaro on Friday (30) said he intends to raise the average amount of Bolsa Família (Family Grant) by at least 50% and even argued that the country should go into debt to pay for the social program.

The president said that on Friday he would meet with the federal government’s economic team to determine the Bolsa Familia’s new amount, which is currently “low” at R$192 (US$37).

Last week, Bolsonaro had announced that the average value of the Bolsa Família would be readjusted to above R$300.

“Why raise it by at least 50%? Because inflation is here. Food inflation has affected the whole world, not only Brazil, because of the ‘stay at home, we’ll see about the economy later’ policy,” he said, criticizing the social isolation measures imposed to curb the spread of Covid.

The president also said that the emergency aid payment, which comprised 4 installments in 2021 and has been extended to October this year, may continue if the “pandemic issue is not resolved.”

“We must consider the emergency aid and Bolsa Família issue and spend money on it, or get into debt – which is the right word -, to meet the most needy until the economy returns to normal,” he said.

The news was not welcomed by the financial market, with concerns about the spending cap growing. At around 4:30 PM, the Ibovespa index was down 2.7% at 122,298 points.

Minister of Economy Paulo Guedes on Friday said that the government will not breach the spending cap rule because of Bolsa Família.

His concern is that the account may not close. According to the economic team’s estimates, next year’s spending cap should leave room for an additional R$25 to R$30 billion in spending, compared to this year’s budget.

The boosted Bolsa Família, at an average R$300 a month paid to the current 17 million beneficiaries, would barely fit into this calculation. Preliminary estimates indicate that increasing the payments would create an extra expense of at least R$26 billion.

Consequently, concerns about breaching the spending cap have taken on a new dimension. On Friday, June 30, the yield curve began to steepen again, indicating a growing concern about the relaxation of the fiscal rule next year.

“If the cap is not respected, there should be a very negative reaction in asset prices, particularly in foreign exchange,” says MB Associados economist Sérgio Vale. “The perception will be that they are breaching the cap for populist reasons, which would represent a sad end to a fiscal policy that has been so poorly conducted.”

The government has been signaling that it should implement new social programs, such as the BIP, which provides for the generation of jobs for youths. Minister of Economy Paulo Guedes on Friday said that the benefit will be financed with extraordinary credits of up to R$3 billion. “It is still a matter of tackling the pandemic because the unemployment incidence was very strong on these young people,” the Minister said.

The idea of raising the pay of public servants is not ruled out either. “Signs of new spending that may please the population in an election year create political and economic uncertainties that are difficult to measure,” says Hold Assessoria’s political analyst André Cesar. “In addition to this, there are questions about the administrative and tax reform being passed, a crucial agenda.”

The rise in Bolsa Família alone should lead to an extra impact of R$26.2 billion, according to RPS Capital’s estimates. As a result, the 2022 budget would barely have enough room to accommodate this increase.

“In addition, we must remember that next year’s budget is still unclear as it will depend on real inflation at the end of the year and the impact on wages and social security,” Vale says.