{"id":95688,"date":"2025-09-08T10:10:05","date_gmt":"2025-09-08T13:10:05","guid":{"rendered":"https:\/\/murray.adv.br\/?p=95688"},"modified":"2025-09-08T10:10:05","modified_gmt":"2025-09-08T13:10:05","slug":"expected-fiscal-boost-may-limit-room-for-monetary-easing","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/expected-fiscal-boost-may-limit-room-for-monetary-easing\/","title":{"rendered":"Expected fiscal boost may limit room for monetary easing"},"content":{"rendered":"
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Delayed spending, court-ordered payments, and tax changes could lift demand and inflation in second half<\/strong><\/em><\/h6>\n<\/div>\n<\/div>\n
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09\/08\/2025\u00a0<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/section>\n

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Economists say a concentration of federal spending in the second half of 2025 is likely to shift Brazil\u2019s fiscal impulse from negative to neutral, or even positive. What remains uncertain is how this stimulus will ripple through demand and inflation, especially as markets look for clues about when the Central Bank may begin cutting interest rates.<\/p>\n<\/div>\n

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\u00cdtalo Franca, head of fiscal policy and special studies at Santander, estimates that the federal government\u2019s fiscal impulse was between -0.8 and -1 percentage point of GDP in the first half of the year. For the second half, however, he expects a positive impulse of about 0.5 points. For 2025 as a whole, Franca still sees a slightly negative figure. \u201cI\u2019m projecting -0.3 points of GDP, but across all models it ranges from neutral to slightly negative. The year has two different halves. From now on, things tend to accelerate,\u201d he said.<\/p>\n<\/div>\n

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Mr. Franca noted that Brazil has seen two strong years of fiscal stimulus. Between 2023 and 2024 alone, the federal government’s impulse reached 2 points of GDP, and the figure climbed to 2.5 points when including states, municipalities, and state-owned companies. \u201cIt was a significant fiscal push,\u201d he said.<\/p>\n<\/div>\n

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This year began with fiscal tightening. Of the R$30 billion in budget freezes announced in early 2025, only R$10 billion remain, Mr. Franca pointed out. Moreover, delays in approving the 2025 budget meant that government execution was low in the first half, pushing more spending to the second. Adding to that is the R$60 billion in court-ordered debt payments (precat\u00f3rio<\/em>s) made in July, whereas in 2024, those payments occurred in February.<\/p>\n<\/div>\n

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\u201cWe went through the first half with both fiscal and monetary policy pulling in the direction of slowing activity. Now, fiscal policy is set to become more expansionary,\u201d Mr. Franca said. \u201cWe\u2019ll likely see more execution of congressional earmarks and discretionary spending, with a stronger release of investment funds.\u201d<\/p>\n<\/div>\n

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Still, most economists forecast an overall slowdown in the second half due to the lagged effects of high interest rates. In this context, Mr. Franca noted that families may use\u00a0precat\u00f3rio<\/em>\u00a0payments to reduce debt or build savings, rather than spend them, dampening the multiplier effect. \u201cBut I think the fiscal impulse will start to add resilience,\u201d he said.<\/p>\n<\/div>\n

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Fiscal boost<\/strong><\/p>\n<\/div>\n

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Looking ahead to 2026, Mr. Franca expects a positive fiscal impulse of 0.4 points of GDP from the federal government alone. \u201cThere\u2019s a series of measures set to impact the economy. That\u2019s where the market\u2019s biggest uncertainty lies, how much of this stimulus will materialize.\u201d<\/p>\n<\/div>\n

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Spending by subnational governments could also play a major role. \u201cStates are in a position to go through one semester of adjustment and start expanding [spending] again in the last quarter of 2025,\u201d Mr. Franca said. He estimates that state and local governments could add around 0.5 points of GDP in fiscal stimulus between the end of this year and mid-2026.<\/p>\n<\/div>\n

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\u201cKeep in mind they have around R$150 billion in net cash. Not all of it can be spent\u2014some is earmarked for pensions\u2014but it shows there\u2019s fiscal space,\u201d he said. States posted a R$26 billion primary surplus in the 12 months through July, but Mr. Franca expects that to shrink. \u201cIn 2022 [an election year for governors], state surpluses went from R$100 billion in April to R$3 billion in May 2023,\u201d he recalled.<\/p>\n<\/div>\n

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Some federal programs could further boost regional spending. The PROPAG debt repayment plan for states could add another 0.2 points of GDP in fiscal impulse, depending on how many governors participate.<\/p>\n<\/div>\n

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Another factor is the proposed constitutional amendment (PEC 66), which would cap\u00a0precat\u00f3rio<\/em>\u00a0payments by states and municipalities and allow longer timelines for settling pension-related debts. \u201cSo we should see rising fiscal stimulus from now on,\u201d Mr. Franca said.<\/p>\n<\/div>\n

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\u201cThe impact of income tax exemptions on demand could be significant<\/p><\/blockquote>\n<\/div>\n

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\u2014Renan Martins<\/p><\/blockquote>\n

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This is one reason why Santander continues to forecast Brazil\u2019s benchmark interest rate Selic remaining at 15% through year-end. \u201cFiscal stimulus creates uncertainty. It may limit how much room monetary policy has. There are big questions about how this stimulus will affect demand and inflation. Rate cuts look more feasible in the first quarter of next year,\u201d Mr. Franca said.<\/p>\n<\/div>\n

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The government\u2019s recently announced\u00a0support package for sectors hit by U.S. tariffs\u00a0<\/a>also enters the picture. For now, BTG Pactual economist F\u00e1bio Serrano sees it as \u201cwell balanced\u201d fiscally. But since the package falls outside Brazil\u2019s spending cap and primary result targets, it risks becoming more expansive as it moves through Congress, he noted in a report.<\/p>\n<\/div>\n

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Even with this new spending, Mr. Serrano projects that federal expenditures won\u2019t grow more than 3% in real terms in 2025. \u201cIf we reallocate the\u00a0precat\u00f3rios<\/em>\u00a0paid at the end of 2024 to early 2025, when the money actually reached families and businesses, primary spending would contract 1.2% in real terms, after real increases of 8.1% in 2024 and 7.7% in 2023,\u201d he wrote.<\/p>\n<\/div>\n

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Economic consultancy 4intelligence estimated a negative fiscal impulse of -1.5 points of GDP in the first half of 2025, which helped to contain aggregate demand and inflation. That restraint, however, is unlikely to persist in the second half, with projections pointing to a nearly neutral fiscal impulse by year-end.<\/p>\n<\/div>\n

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\u201cThe government has had some success in raising revenue, which eases concerns about the primary deficit,\u201d said Renan Martins, economist at 4intelligence.<\/p>\n<\/div>\n

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On the demand side, Mr. Martins noted that the planned expansion of income tax exemptions starting in 2026 may be fiscally neutral\u2014offset by higher revenue\u2014but will likely have a significant impact on consumption. \u201cThe income brackets that will benefit are the ones most likely to boost aggregate demand, which will affect inflation next year and beyond,\u201d he said.<\/p>\n<\/div>\n

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Mr. Martins has not factored in a potential increase in Bolsa Fam\u00edlia cash-transfer payments, despite the upcoming election year. \u201cDue to new eligibility criteria, many families no longer qualify for the program. If the government wants to increase payouts next year, there\u2019s a bit of room for that,\u201d he said.<\/p>\n<\/div>\n

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In his view, most of the fiscal impulse in the coming quarters will come from regional governments. \u201cIn recent years, states secured a lot of loans with federal approval or guarantees. Now, heading into another election cycle, they\u2019ll likely strike new deals with Congress to release earmarked funds,\u201d Mr. Martins said.<\/p>\n

*By\u00a0Ana\u00efs Fernandes\u00a0\u2014 S\u00e3o Paulo<\/p>\n

Source: Valor International<\/p>\n

https:\/\/valorinternational.globo.com\/<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/article>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Delayed spending, court-ordered payments, and tax changes could lift demand and inflation in second half     09\/08\/2025\u00a0 Economists say a concentration of federal spending in the second half of 2025 is likely to shift Brazil\u2019s fiscal impulse from negative to neutral, or even positive. 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