Will monetary policy, once again, be unable to count on fiscal policy’s support to combat inflation?
Two weeks ago, the government trumpeted a R$ 50 billion “cut” in the 2011 budget, which the Minister of Finance called “fiscal consolidation”. We are still awaiting details.
Since the announcement of this positive – albeit undefined – initiative to contain the expansion of public spending, public finance specialists have voiced two criticisms. The first is that it does not really represent a cut, as the federal government’s primary expenditures (except interest) would still increase, after the “cut”, from R$ 657 billion (17.9% of GDP in 2010) to R$ 719 billion (17.7% of GDP forecast for 2011). The predicted 0.2% of GDP decline in federal primary expenditures will probably be insufficient to meet the primary surplus target (2.9% of GDP), unless there is a repetition of the creative accounting that raised the primary surplus in 2010.
The second criticism casts doubts on the feasibility of cutting R$ 50 billion from this year’s budget without, as the government has promised, affecting social expenditures and PAC (Growth Acceleration Program) investments. The rigidity of the Union’s budget prevents the cut from affecting most of the R$ 769 billion primary expenditures budgeted for 2011, thus making only R$ 220 billion eligible for cuts. Subtracting the R$ 220 billion spent on social programs (e.g. the Family Grant Program), education and health, as well as PAC investments, leaves only R$ 60 to R$ 100, depending on the different estimates used. In other words, in order to cut R$ 50 billion it will be necessary to cut social expenditures or PAC investments.
As to how this cut will be carried out, one may suppose – based on past experience – that it will be performed, for the most part, by delaying expenditure payments, resorting, that is, to “leftovers to be paid”. As the primary surplus in Brazil is still calculated on a cash basis – according to which an expenditure is only appropriated when paid for, not when it is effectively executed – a given year’s fiscal surplus may be raised simply by postponing the payment of expenditures to the following year. This increasingly popular maneuver has allowed the primary surplus to be artificially inflated.
In sum, when one excludes social expenditures and public investments, the government will be hard put to achieve a “cut” of R$ 50 billion this year. If it does manage to do so, it will be as a result of totally or partially executed expenditures that have not been paid for, which will weigh on budgets in coming years or increase net debt in the future.
This situation leads us reflect on the objectives of a tighter fiscal policy. Increases in the primary surplus have occurred in some years since the Real Plan. On these occasions, the fiscal adjustment’s aim was to make it clear that the public debt was not on an explosive growth path.
The present “fiscal consolidation” is not due to immediate concern regarding the government’s solvency, given that Brazil’s country risk – one of the measures of default risk – is at historically low levels. Rather, the current perception is that, without fiscal policy’s support, monetary policy will require even higher interest rates to keep inflation on target. This change in fiscal policy’s motivation has implications for an evaluation of its performance.
Take, for example, the accounting trick used to inflate the primary surplus during the Petrobras capitalization. As is well known, the National Treasury lent funds to the BNDES (Brazilian National Development Bank), which bought Petrobras shares. Petrobras then used the funds that had originally come from the Treasury to pay for part of the pre-salt exploration rights. This passage of funds from the NT’s “right pocket” to its “left pocket” generated a primary surplus of around 1% of GDP.
Even if one accepts this creative accounting, one must recognize that the fictitious fiscal revenues generated during the Petrobras capitalization are strictly neutral as a fiscal impulse. There was merely an exchange of assets: Petrobras received the rights to explore oil and the Treasury, via the BNDES and the BSF (Brazil’s Sovereign Fund), was saddled with more Petrobras shares. Even those that conceived the accounting trick used to window dress 2010’s fiscal result would find it absurd to assert that the increase in the primary surplus obtained in this fashion had a contractionary impact on aggregate demand equivalent to a spending reduction or tax increase of the same magnitude.
In other words, as the aim of “fiscal consolidation” is to help monetary policy curb the increase in inflation, nothing will be gained by tricks like postponing the payment of expenditures or anticipating revenues. What is important is to reduce demand growth. Thus, it is necessary not only to demonstrate clearly how the 2011 “cut” will be made, but also to present a multi-annual plan in which public spending over time declines as a proportion of GDP.
Unfortunately, the signs, up to now, leave little room for optimism. A new R$ 50 billion loan to the BNDES has been announced for 2011. Even if the government manages to cut the promised R$ 50 billion in 2011, this new loan to the BNDES will offset the effects of the cut on aggregate demand, although it may have some effect on aggregate supply. As for the multi-annual plan to reduce the weight of public spending in GDP, the president’s last official declaration on the subject dates from as far back as 2005 when, as a minister in the Lula administration, she said the IPEA’s (Applied Economics Research Institute) public spending reduction plan – defended by ministers Palocci and Paulo Bernardo – was rudimentary.
The return of the CPMF (a federal tax on financial transactions), based on the excuse of providing funds for health, is an even more alarming prospect. Unfortunately, the most probable outcome is that the government will continue to insist on a policy mix of public spending growth, a heavier tax burden and higher real interest rates, with all their negative impacts on investment, employment and economic growth.
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