Analysts say the best performance since 2016 is still insufficient; fiscal constraints limit government spending in areas like infrastructure
09/18/2024
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Federal government investments reached their highest level for the first seven months of 2024 since 2016. However, economists consulted by Valor warn that these investments are still insufficient to significantly boost economic growth or ensure adequate infrastructure for the country. This responsibility largely falls to the private sector given Brazil’s fiscal constraints. Despite the recent increase, federal investment remains below the average of developed countries and continues to lack transparency.
From January to July this year, federal investments totaled R$32 billion, the highest level for this period since 2016, when disbursements reached R$36.8 billion. These figures, obtained by Valor from the official records of the National Treasury Secretariat (STN), are adjusted to July 2024 prices and exclude financial investments. Compared to the same period last year, there was a 31.8% increase.
In the early 2010s, annual federal investments hovered around R$50 billion. However, the increasing need for fiscal adjustments—culminating in adopting the spending cap in 2016—and the difficulty in cutting mandatory expenses led to fiscal adjustments primarily targeting discretionary spending, such as investments. Brazil’s budget rigidity, with over 90% of mandatory expenses, also limits the amount the government can invest.
Consequently, there were years when federal investments were insufficient even to cover the depreciation of federal infrastructure—a situation that has improved with increased disbursements in recent years.
Following the approval of the so-called Transition Constitutional Amendment at the end of 2022 and the new fiscal framework for federal accounts last year, these disbursements have started to grow again. The framework sets a minimum of 0.6% of GDP for federal investments.
The Annual Budget Bill (PLOA) for 2025, presented at the end of August, mandates that investments must reach at least R$74.3 billion. For this year, the minimum is R$68.5 billion. These figures include disbursements from the New Growth Acceleration Program (PAC), launched by President Lula in 2023.
“Public investments remain very low,” said Manoel Pires, coordinator of the Center for Fiscal Policy and Public Budget at the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV Ibre).
He noted that last year these disbursements amounted to 0.5% of GDP. Including investments by state-owned companies, which often serve as an outlet for infrastructure spending in Brazil, the figure rises to 2% of GDP.
In contrast, average federal disbursements by OECD countries are around 3.5% to 4% of GDP—a difference that, accumulated over the years, results in a significant gap in capital stock between Brazil and developed countries.
“Brazil’s case is particularly severe because our infrastructure is very poor. Other countries don’t have as much need for investment,” said José Ronaldo de Souza Jr., chief economist and partner at consultancy Leme Consultores, and a professor at the Brazilian Institute of Capital Markets (IBMEC).
While the economists consulted by Valor advocate for most investments to come from the private sector, they also acknowledge that federal contributions are often necessary to make projects viable. Mr. Souza Jr. cited the highway BR-381 as an example. Auctioned in August by the federal government, the BR-381, known as the “Death Road” for its dangerous conditions, involves technically challenging construction. The auction stipulates that 31 kilometers out of a total of 296 kilometers will be turned into a freeway by the federal government itself.
Despite agreeing on the need to expand investments, analysts emphasize the importance of maintaining the current fiscal framework to avoid greater imbalances in the federal budget. Currently, the gross government debt (DBGG), considered by many economists as the primary indicator of federal indebtedness, stands at 78.5% of GDP, according to the Central Bank. This figure represents an increase of 6.8 percentage points since the beginning of President Lula’s third term.
Moreover, there is near-unanimity among public finance experts that the indicator will continue to rise in the coming years. The Independent Fiscal Institution (IFI), a Senate-affiliated fiscal policy watchdog, projects that the DBGG will reach 100.6% of GDP by 2034.
A third complicating factor is that Brazil’s starting point is higher than most emerging markets. According to the International Monetary Fund (IMF) in March, Brazil’s gross debt exceeds the average for emerging countries by more than 15 percentage points, trailing only Egypt, Ukraine, and China.
“Everyone is scrutinizing Brazil’s public debt closely,” said Margarida Gutierrez, a professor at the Federal University of Rio de Janeiro who likens the federal government to “constantly using an overdraft line of credit.”
Economists say the main way to create fiscal space for increased investments would be to change the rules for mandatory federal spending. Among the suggested options are unlinking social security and welfare benefits from minimum wage hikes, indexing the minimum wage only to inflation without real increases, and modifying constitutional spending floors for health and education, currently tied to revenue. From January to July, the total federal expenditure was R$1.325 trillion, but only R$32 billion was allocated to investment.
As reported by Valor in recent weeks, the economic team is discussing changes to the rules governing several sources of mandatory spending pressures, such as unemployment insurance, the Workers’ Severance Fund (FGTS), wage bonuses, the Simples Nacional a simplified tax regime for small businesses), and the FUNDEB (Fund for Maintenance and Development of Elementary Education). These suggestions are expected to be formally presented only after the municipal elections to be held in early October.
“A country with such high public expenses cannot have such low spending on investments that create positive externalities for the economy and well-being,” said Mr. Souza Jr.
“Every time Brazil sees a bit of growth, we start running out of ports, airports, sanitation, highways, railways,” added Mr. Gutierrez.
Another issue highlighted is the lack of transparency in federal investments. The investments reported monthly by the Treasury include parliamentary budget allocations, which have been a subject of discussion among the Executive, Legislative, and Judiciary branches due to their lack of transparency.
“In accounting terms, the expenses are recorded as investments, but many items end up under this category,” said Bruno Lavieri, chief economist and partner at intelligence.
*Por Estevão Taiar — Brasília
Source: Valor International