Brazil’s Public Finances at a Critical Level

By Reuters

RIO DE JANEIRO, BRAZIL – Brazil’s public investment is grinding to a virtual standstill and could fall to a new record low below 0.5 percent of gross domestic product this year if the government is forced to tighten the squeeze on discretionary spending, the Treasury said on Monday.

This would be the lowest ever level of public spending as a share of the economy, and would represent a continued decline from 0.7 percent of GDP last year and 1.7 percent of GDP in 2014, the Treasury said.

The forecast accompanied figures that showed the central government’s primary deficit narrowed in March and over the first quarter, but which once again highlighted the precarious state of the country’s public finances.

Treasury Secretary Mansueto Almeida said the improvement so far this year was “temporary,” and warned that an uncertain revenue outlook coupled with onerous non-discretionary spending commitments such as social security could hit federal investment in 2019.

“We’re getting to a very critical level,” Almeida told reporters, noting that when discretionary spending is cut, the area that is often sacrificed the most is public investment.

Public investment in Brazil has been on a downward path for years, battered by the 2015-16 recession, from which the economy has still not fully recovered. This has forced governments to try and shore up the public finances by slashing spending, most notably via pension reform.

Since 2014, public investment has fallen 60 percent, Almeida said, a startling statistic for a country that invests little, to begin with. It was 1.7 percent of GDP in 2014, and 0.7 percent of GDP last year.

Almeida noted that government revenues could suffer from the steep fall in the price of oil late last year, although crude has recovered some 40 percent this year. But Brazil’s economy is also struggling – some economists reckon it may even have shrunk in the first quarter – which will hit the tax take.

“The problem this year is not spending, but revenue,” Almeida told reporters.