Brazil Faces US$7 Billion Hole in 2021 Budget From Emergency Aid, Inflation – Source

RIO DE JANEIRO, BRAZIL – Brazil faces a R$35 billion (US$7 billion) hole in its 2021 budget due to emergency aid payments being held over to next year and welfare benefits indexed to a higher inflation rate than anticipated, a source on the government’s economic team said.

The actual figure has not been determined yet because this year’s emergency expenditures to tackle the COVID-19 crisis have not been fully tallied. But it will put additional pressure on an already critical fiscal situation, according to the source, who asked not to be identified because the projection has not been made public.

Brazil’s government will already chalk up a record budget deficit this year excluding interest payments of R$844.3 billion, worth 11.7% of gross domestic product, according to its latest forecast.

Most of that is income transfers to millions of Brazil’s poorest families. The government insists it will end the transfers later this month and begin getting public finances back on track next year, keeping its spending cap rule intact.

A R$35 billion hole in next year’s budget would require spending cuts in other areas of the same amount for the cap rule to be met. The rule limits growth in public spending to the previous year’s rate of inflation.

The 2021 Annual Budget Law forecast discretionary spending of about 100 billion reais. Any reduction to that could pose a serious threat to some government departments and public services.

The Independent Fiscal Institute, a bipartisan Senate office that aims at transparency in government accounts, estimates 90 billion reais of discretionary expenditure is needed to keep the public sector machine functioning properly.

The government’s draft 2021 budget in August forecast the 2020 INPC rate of inflation at 2.09%, to which benefit payments next year will be indexed. But last month that estimate jumped to 4.10%.

The economy ministry estimates that every 0.1 percentage point rise in the INPC increases total net expenditure by R$721 million. An annual INPC rate of 4.1% would imply R$14.5 billion of additional spending in the 2021 budget.

Figures this week showed that the INPC rate of inflation rose to 5.2% in November, which would lift benefit spending next year by around R$22.4 billion.

Source: Reuters