(Bloomberg) — It’s only a matter of time until President Luiz Inacio Lula da Silva ditches his own government’s zero-deficit fiscal target to keep spending big as Latin American’s largest economy loses steam next year, according to Genial Investimentos.
Assurances by the ruling Workers’ Party that it will respect Finance Minister Fernando Haddad’s strategy to eliminate Brazil’s primary fiscal deficit in 2024 will not hold true as public spending will outpace tax collection, Jose Marcio Camargo, chief economist at Genial, said in an interview in Rio de Janeiro.
“The target will have to change if Haddad is unable to increase tax revenue,” he said. “The question now is when and by how much.”
Camargo, 76, knows the benefits of social spending — he’s one of the designers of Lula’s flagship Bolsa Familia program which provides income transfers and helped lift millions of Brazilians out of poverty two decades ago. But he’s also worried about the impact of excessive government spending on public debt and creditworthiness.
For weeks, investors have been on edge after Lula indicated he’d rather ditch the zero-deficit target, which doesn’t take into account interest payments, than make cuts to investments and programs he considers essential to improve Brazilians’ living standards. While other fiscal rules approved earlier this year ensure public spending won’t get out of control, a strict deficit goal would also limit lawmakers’ ability to pass tax cuts and subsidies.
Haddad has since been trying to salvage the proposal by cajoling Lula’s allies and members of Congress into helping him plug a budgetary gap through tax hikes and other measures to boost revenue. On Thursday, a member of Lula’s cabinet said the 2024 primary budget deficit would indeed be zeroed.
Read more: Lula to Keep Zero-Deficit Goal in Budget Plan, Minister Says
Bracing for the Worst
But the government can still make changes to the proposal. And with Brazil’s public finances already deteriorating, Camargo says investors are bracing for the worst.
In September, Brazil posted a primary budget gap of 18 million reais, the fifth straight month the government ran a deficit. Congress has yet to approve measures that would help generate the 168 billion reais ($34.5 billion) in new revenues that Haddad is seeking to fulfill his budget proposal. Meanwhile, social expenditures like the minimum wage and pensions are set to increase.
“The market is very concerned about how the fiscal issue will evolve,” Camargo said. Without a credible target no one will be able to keep tabs on spending and “we’re going back to a scenario like we had at the beginning of 2023.”
At the start of the year, Brazil’s Congress lifted a constitutional spending limit, allowing billions of dollars to be doled out to aid poor Brazilians. That whipsawed markets.
Spending fears waned with the August passage of the fiscal framework bill, a set of rules proposed by Haddad to shore up public finances. Investors expected the law would mitigate the tail risk that public debt spirals out of control. Currently, the government’s debt-to-gross-domestic-product ratio is running at nearly 75%, according to data compiled by Bloomberg.
Now, with Lula vowing to maintain spending regardless of tax revenues, “You can no longer calculate how debt will evolve against GDP,” Camargo said, adding that the government could adjust the target as soon as March.
On top of a volatile global outlook, marked by high interest rates in the US and a possible slowdown of China’s economy, Camargo says Brazil’s fiscal performance will determine the direction of its assets next year. Markets have rallied recently on Brazil’s central bank cutting rates and on bets that the Federal Reserve will soon follow suit.
For Camargo, the fear of many market participants is that Lula may follow in the footsteps of his hand-picked successor Dilma Rouseff, who doubled down on fiscal stimulus to avoid a recession last decade.
“Will he continue to increase spending, and with it the deficit, to keep the economy from decelerating? That would be disaster.”
Read More: Brazil’s Economy Unexpectedly Shrinks as High Rates Take a Toll
Genial is headquartered in Sao Paulo and offers banking, brokerage and asset management services. It has 170 billion reais in assets under custody, and oversees 45 billion reais under its money management unit, Plural Gestao.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
