Government Tightens Expenditure Controls to Stay Within Legal Spending Limits
Brazil’s government has imposed a freeze on $3.33 billion (19.3 billion reais) of its planned expenditure to ensure compliance with the country’s fiscal rules for the year. The decision comes as part of efforts to adhere to Brazil’s legally mandated fiscal targets and maintain control over public spending, which has been under increasing pressure due to rising mandatory expenditures. This freeze marks an increase from the 13.3 billion reais freeze previously announced in September, as per the most recent bi-monthly revenue and expenditure report from Brazil’s Planning and Finance Ministries.
Fiscal Deficit Forecast Revised Slightly Upward
In addition to the spending freeze, the government has updated its fiscal outlook for 2024, revising the primary deficit forecast to 28.7 billion reais, a slight increase from the previous estimate of 28.3 billion reais. However, this new forecast still aligns with the government’s fiscal target of achieving a zero deficit for the year. The budget allows a tolerance margin of 0.25% of GDP, meaning a shortfall of up to 28.8 billion reais is still within acceptable limits.
Increased Mandatory Spending Drives Budget Adjustments
The need for the additional spending freeze stems from higher-than-expected mandatory expenditures, which, if left unchecked, would exceed Brazil’s legally imposed spending cap. The country’s fiscal framework, approved last year, limits growth in public spending to 2.5% above inflation. When projections for mandatory spending rise, the government is required to offset the increase by freezing discretionary expenditures.
This rise in mandatory spending is largely attributed to higher social security benefits, which have placed pressure on the budget. As a result, the government is working to balance its books by tightening controls over other areas of expenditure.
Concerns Over Fiscal Sustainability and Market Sentiment
The surge in mandatory spending has raised concerns in the market about the sustainability of Brazil’s fiscal strategy, contributing to a rise in long-term interest rates and a weakening of the Brazilian real. The real has depreciated by over 16% against the dollar this year, reflecting investor concerns over the country’s fiscal trajectory.
Finance Minister Fernando Haddad has indicated that the government plans to unveil a long-anticipated package of measures aimed at curbing mandatory spending. While initially expected to be announced following Brazil’s municipal elections in late October, the delay in presenting these measures has led to some dampened market sentiment.
