The estimate comes from economist Alexandre Manoel, of consultancy Global Intelligence and Analytics. In the first quarter, his Expanded Fiscal Expansion Monitor, known by its Portuguese acronym Mefa, stood at 2.19% of GDP. The indicator more than doubled in the following three months, driven mainly by credit operations.

Mefa combines credit, other Treasury financial disbursements used to carry out public policies and the float from so-called restos a pagar, or spending authorized under previous budgets but not yet paid.

Manoel plans to publish the indicator quarterly. His goal is to provide a broader picture of the stimulus the federal government is transmitting to the economy. The higher the Mefa reading, the stronger the impulse.

Economists say measures adopted by the government during this election year have made it harder to ensure fiscal sustainability and for the Central Bank to bring inflation under control. Programs captured by the indicator include Move Brasil, a vehicle-financing initiative, and the expansion of public funds.

Broader measure

Manoel argues that the traditional fiscal yardstick, the primary balance — the difference between government revenue and non-financial spending — captures only part of what the government is doing to boost aggregate demand.

That has become especially relevant, he said, after the government created several credit lines to implement public policies while operating under tight budget constraints.

In his view, Mefa’s main contribution is not the indicator itself, but the proposal for a new analytical framework in which fiscal policy is assessed along two dimensions at the same time: fiscal sustainability, measured by the primary balance, and its macroeconomic impulse.

“The primary balance tells you how the public accounts are doing. Mefa tells you what kind of impulse the government is transmitting to the economy,” Manoel told Valor. “The result is relevant because it reveals a sharp acceleration in fiscal expansion through channels that are not fully captured by the primary balance.”

In the second quarter, the Mefa impulse was driven by financial spending, which reached 3.29% of GDP. That pushed the indicator to its highest level in a decade.

Compared with the second quarter of 2022, the primary balance deteriorated by 1.82 percentage points of GDP, while Mefa increased by 5.27 percentage points.

“The fiscal expansion is much larger,” Manoel said. “That helps us understand why GDP is still growing at 2% despite high interest rates and why the NTN-B [inflation-linked Treasury bond] is yielding more than 8% in real terms, yet the market does not want it.”

With economic activity remaining resilient, investors expect higher inflation and therefore tighter monetary policy, which affects the yield curve. The Selic benchmark interest rate currently stands at 14.25%.

Market visibility

“It is an important indicator because not everyone in the market has the ability to dig into the details of the public accounts,” said Marcos Mendes, an associate researcher at Insper. “So when someone provides that service by creating an indicator that is easy to track, it helps democratize the information.”

Mendes himself occasionally tracks budget resources released through financial channels for lending purposes. His figures also point to strong growth: from 0.64% of GDP in 2022 to 1.45% this year.

He highlighted developments that often receive little attention from analysts. The government, for instance, has been changing legislation governing some public funds so that their current cash flow can be used for lending.

That is the case with the National Civil Aviation Fund, known as Fnac, and the Social Fund, whose scope was expanded to include the Minha Casa, Minha Vida housing program. As a result, Mendes said, it is misleading to view these credit lines as temporary measures financed solely by accumulated fund surpluses.

Wider fiscal lens

“We need to broaden the analysis of the public sector well beyond the basic framework that has been used for a long time — the primary balance and government bond debt,” said Bráulio Borges, an associate researcher at the Brazilian Institute of Economics at Getulio Vargas Foundation, known as FGV Ibre.

As previously reported by Valor, Borges and Manoel Pires, also of FGV Ibre, have proposed an even broader measure that would incorporate the federal government’s net worth into assessments of fiscal sustainability.

“It means stopping looking only at the primary balance and government bond debt and starting to look at all government assets and liabilities, including actuarial liabilities such as Social Security,” Borges said.

Mefa, which has been under discussion for about five months, has also sparked a public debate between Manoel and Borges on FGV Ibre’s blog.

Interest-rate debate

Manoel argues that unpaid budget obligations, credit operations, weaker fiscal-policy controls and higher primary spending have added 2 percentage points to Brazil’s structural interest rate — the rate consistent with the economy growing at its maximum sustainable pace without accelerating inflation.

He also says Mefa indicates that Brazil’s fiscal position is now worse than in 2022, the final year of Jair Bolsonaro’s presidency.

Borges, however, points to higher interest rates in the United States as another factor behind Brazil’s increase.

“Since 2022, international interest rates have also risen by two percentage points,” he said. “International rates are, in a way, the floor for what Brazil has to pay.”

To assess perceptions of Brazil’s public finances, Borges looks at the spread between long-term Brazilian and U.S. interest rates as a gauge of how bondholders are pricing risk. By that measure, he said, the current assessment is similar to 2022.

Despite their differences, Borges also believes the government’s current strategy of implementing public policy through credit is misguided.

“If the idea is for fiscal policy to help stabilize the economic cycle, it should be contractionary and work in coordination with monetary policy, but that is not happening,” he said. “Part of the reason is that there is a political and electoral cycle in the middle. Unfortunately — and we see this in many countries around the world — governments turn on every possible tap during elections, in part because it is becoming increasingly difficult for incumbents to win reelection.”

The result, Borges said, is a higher interest rate, which in turn worsens the outlook for debt sustainability.

Valor contacted the Finance Ministry for comment but did not receive a response.

By Lu Aiko Otta — Brasília

Source: Valor International

https://valorinternational.globo.com/