Rising Debt Amid Push for Increased Spending in Brazil

(Analysis) Tax collection spiked in January, yet President Luiz Inácio Lula da Silva’s administration is far from achieving fiscal balance.

Despite this revenue uptick, primarily from one-time events, there’s concern.

The government may view it as an opportunity to boost spending, risking further public debt increase.

President Lula has already suggested expanding the government spending limit, a move critics find worrisome given the climbing public debt-to-GDP ratio, now higher than ever since July 2022.

The recent reversal in Brazil’s debt trajectory is alarming. After declining for two years, the debt ratio escalated from 71.7% to 74.3% of GDP within just twelve months

Brazil’s gross debt is expected to climb to 77.7% of GDP this year, an increase from last year’s 77.4%. Projections indicate a further rise to 80.2% by 2025.

These figures come from the Independent Fiscal Institution (IFI), a transparency organization linked to the Federal Senate.

The primary budget, encompassing all government levels and state enterprises, showed a significant deficit, only slightly improved from the previous month’s record low since the 2020 pandemic.

What’s more alarming is the skyrocketing interest payments, making up a substantial part of this deficit.

Since 2014, these payments have been financed by accumulating more debt, indicating no government savings.

The debt’s impact on economic growth and inflation highlights the need for careful monitoring and fiscal discipline.

Interest rates play a crucial role in the debt scenario, with current levels among the highest globally.

Economic growth rate remains insufficient

Although the Central Bank may reduce rates, the economic growth rate remains insufficient to counteract the primary deficit’s impact on debt levels.

Thus, balancing government expenditures and revenues appears to be the sole solution for reducing debt.

Despite announced spending reviews and fiscal planning initiatives, skepticism remains.

The government’s reluctance to cut expenses, opting instead to increase revenue, may not suffice to address the fiscal challenges ahead.

As Brazil navigates through these economic uncertainties, the path to fiscal sustainability remains fraught with difficulties, emphasizing the need for prudent fiscal management and policy adjustments.