May 22, 2019 / 5:00 AM / 4 months ago

Brazil eyes another round of budget freezes, weighing on economy

BRASILIA, May 22 (Reuters) - Brazil’s government is expected to announce another round of budget freezes on Wednesday, raising the risk of pushing the country’s already weak economy closer to recession and adding to political pressure on President Jair Bolsonaro.

The last bimonthly public spending and revenue report in March called for 30 billion reais ($7.4 billion) of spending freezes. Economy Ministry sources told Reuters the new freezes will be worth around 5 billion reais.

The government is also expected to cut its 2019 growth forecast on Wednesday to 1.6% from 2.2%, underscoring concerns about Brazil’s economy after what is likely to be a first-quarter contraction.

While few dispute the need to fix Brazil’s public finances, the latest austerity measures — especially cuts to public investments — could have serious political and economic consequences.

Tens of thousands took to the streets of more than 200 cities last week in the biggest demonstrations yet against Bolsonaro over a recent decision to freeze nearly a quarter of discretionary spending controlled by the Education Ministry.

Approval ratings have been sliding for the former Army captain, who was elected on a law-and-order anti-corruption platform, since Bolsonaro became president on Jan. 1, in large part due to a lack of progress on the economy.

The government insists it must be tough because it is struggling to meet this year’s budget target of a 139 billion reais ($34 billion) deficit before debt payments. To critics and some economists, cutting spending as the economy sputters is akin to digging to escape a hole, however.

Public investment in Brazil is the lowest on record for the country and falling. The Treasury said it could be less than 0.5% of gross domestic product this year, below last year’s 0.7% of GDP and well below 1.4% of GDP five years ago.

Treasury Secretary Mansueto Almeida has acknowledged that public investment is getting to “critical” levels. But in an interview with Reuters last month, he said spending must be brought under control even if it harms the economy in the near term.

“It doesn’t matter if the economy is growing faster or slower, we need to cut expenditure. As soon as the economy starts growing again, we will have the revenue and we can increase investment again,” he said.

FISCAL MULTIPLIER

In tough economic times, the so-called ‘fiscal multiplier’ in public investment is particularly high, said Rodrigo Orair, director at the Independent Fiscal Institute, a non-partisan think tank funded by Brazilian senators.

In other words, growth generated by a dollar of public investment is far higher than the growth that would be generated by a dollar of subsidies or tax cuts, typically the Brazilian government’s two preferred fiscal stimulus tools.

“It is widely recognized that public investment has higher multipliers than most government expenditures, so cutting public investment has a more severe impact on economic growth,” Orair said. “It is not a good path to follow.”

A constitutional spending cap is expected to force public expenditure over Bolsonaro’s four-year term to be cut by at least two percentage points of gross domestic product.

In addition, if it looks like revenues are going to undershoot forecasts and imperil the primary budget balance target, the government must suspend or cut discretionary spending.

That often means less public investment, including spending on essential services and medium- to longer-term projects such as health, education, sanitation and roads.

The lion’s share of public spending is non-discretionary, or outlays that the government must meet, such as payrolls and social security benefits. This expenditure continues to grow, which is why the government has put forward a pension reform bill that aims to save 1.2 trillion reais over the next decade.

$1 = 4.0517 reais Reporting by Jamie McGeever Additional reporting by Marcela Ayres Editing by Brad Haynes and Sonya Hepinstall

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