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Rising Revenues Only Ramp Up Pressure on Brazil’s Finance Minister
(Bloomberg) -- Brazil Finance Minister Fernando Haddad is on the brink of a win this week, when official data is expected to show that he is far closer to reaching his lofty goal of eliminating the country’s primary fiscal deficit than investors predicted he would be.
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A sluggish economy and President Luiz Inacio Lula da Silva’s desires to spend more to juice growth, however, have ensured the victory will be bittersweet.
The government’s first fiscal report of 2024, set for release Friday, will indicate that Brazil’s deficit is on track to finish the year within the tolerance range of 0.25% of gross domestic product required by the nation’s fiscal framework law, according to a person familiar with the matter.
Markets last year expressed deep skepticism of Haddad’s plan to zero the primary deficit, which excludes interest payments, through new revenues. But the improving outlook has been driven by his success on that front: Brazil hauled in 186.5 billion reais ($37.5 billion) in February tax collections — a record for the month and nearly 30 billion reais more than a year ago — according to Finance Ministry data released Thursday.
That followed 280 billion reais in tax collections in January, another record propelled by new levies on the wealthy. As a result, the government is likely to have to freeze less of its budget than previously expected, and Haddad will for now avoid the worst outcome the fiscal framework could have generated: Large-scale spending cuts that would have drawn Lula’s ire.
For most of last year, Lula stood by his protege and potential political heir even as allies barked that Haddad’s devotion to deficit reduction threatened their plans to expand social programs. Now, with the economy sputtering and his popularity sagging below 50%, the leftist leader has ramped up calls for additional investments — and turned the revenue gains into evidence that he has room to use spending to help reverse the decline.
Read More: Lula Irks Investors in Bid to Spur Brazil Growth, Boost Approval
“Revenue is increasing beyond what many people expected,” Lula said at a recent event in Brasilia. “Of course we have a spending limit, but when we have more money we will have to discuss that spending limit with the lower house and Senate, and we will see how we can use more money to deliver more benefits to the people.”
Preaching Patience
Haddad has continued to preach caution, and wants to monitor collections in the coming months for signs that the early revenue increases are sustainable, according to two people familiar with his views who requested anonymity to discuss internal matters.
That would give him and the government more time to assess whether they need to alter the zero-deficit target, the people said, even amid widespread predictions that it will eventually have to change.
The better-than-expected outlook indicates that there is currently “low or zero need for budget freezes,” said Felipe Salto, chief economist at Warren Investimentos in Sao Paulo. “But this doesn’t mean that, throughout the year, it will not be necessary to cut.”
Lula’s patience, however, appears to be wearing thin. This week, he called a cabinet meeting that forced Haddad to cancel a trip abroad, and urged his team to produce concrete proposals to jumpstart the economy.
“All we’ve done so far is just the beginning and not enough,” Lula said as the meeting opened. “We’ll have to do much more.”
Haddad has some space to increase spending before deciding if a change to the target is necessary: The fiscal rules allow the government to spend as much as 15 billion reais more if revenues exceed projections, according to a third person with knowledge of the situation, thanks to a one-year mechanism Haddad created to account for tax cuts and subsidies authorized by former President Jair Bolsonaro.
That decision will be made in June, when the government is scheduled to release its second fiscal report of the year.
Market Concern
Financial markets are pricing in primary deficits of 0.75% this year and 0.6% for 2025, according to the central bank’s weekly survey of economists. Most now see a target change coming only later this year, rather than in mid-April, when the government has to submit its budget guidelines to congress, analysts from JPMorgan Chase & Co. wrote in a recent report.
Haddad’s early efforts won over Brazilian investors who initially worried about his appointment, and he maintains solid approval among them: Half of analysts viewed him positively in a survey released Wednesday by Brazilian pollster Quaest Pesquisa, compared to just 12% that rated him negatively.
Read More: Brazil Finance Chief’s Market-Friendly Pose Alienates the Left
But nearly two-thirds now view Lula’s government poorly, according to the poll, in which they also expressed fear that the president’s falling popularity could undermine Haddad’s efforts — and the fiscal goal.
Investors increasingly see the need to “closely monitor” the possibility of a earlier-than-expected target change, JPMorgan’s analysts wrote, “particularly in the context of the recent decline of the government’s approval rating.”
--With assistance from Simone Iglesias, Maria Eloisa Capurro and Josue Leonel.
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