MNI INTERVIEW: More Brazil Budget Freezes If Needed -Guimaraes

MNI (BRASILIA) - The Brazilian government has space to freeze around BRL20 billion more in expenditures from its 2024 budget if necessary, on top of BRL13.3 billion blocked two weeks ago, but is not actively pursuing the lower limit of its target range for fiscal balance, Planning and Budget Ministry Executive Secretary Gustavo Guimaraes told MNI.

Guimaraes said the negative market reaction to the decision to unfreeze BRL3.8 billion of spending in the ministry’s last bimonthly report was a result of a misinterpretation of Brazil’s new fiscal rules. The net effect of the unfreezing was only to release BLR1.7 billion in funds because of an increase in blocks on other spending due to excessive growth, Guimaraes said in an interview.

Guimaraes noted that under Brazil’s rules, “blocks” on spending which is growing too quickly are a stricter restriction than a spending “freeze”, which sets funds aside into a contingency reserve when revenues fall short of forecasts. The bimonthly reports also gradually allow ministries access to a budget for discretionary spending.

"The contingency reserve depends on revenue. If I have revenue performing better than what was in my previous bimonthly report, I can release the contingency reserve, which is exactly what happened now," Guimaraes said.

"That's why the block is much harder to release, because it depends on expenses, which are on a growth trajectory and already programmed in the budget. To unblock, it would need mandatory expenses to decrease, which is much more unlikely.” (See MNI BRIEF: Law Requires Budget Unfreeze With Higher Revenues)

BUDGET TARGET

The government is not trying to hit the lower limit of the range stipulated in its fiscal rules, which call for a balanced budget in 2024 within a range of 0.25% of GDP, he said.

"I don’t agree with saying that the rule is seeking the lower level of the target's range, because when we do the budget, we are mindful of the goal, but adjustments must be made due to an increase in expenses or lower-than-expected revenue," Guimaraes said, adding that by law, the ministry can freeze resources only if it estimates that it is on course to miss the target range.

"The constitution mandates the public budget and expenditures. We cannot refrain from executing a public expense. This expenditure has an allocation in the budget that was decided by the national congress during the budget process.”

The government has earmarked BRL20 billion for potential spending freezes in the final two months of the year to ensure that it keeps the deficit to no more than 0.25% of GDP or BRL28 billion, he said. If there is no need for a freeze, the amount would be unfrozen at the end of November, he added.

"When I say I’m holding back BRL20 billion for the last two months, but it’s really just December, it’s actually one month. Because we’re going to close the next bimonthly report at the end of November. Even operationally, it's hard to spend BRL20 billion in one month. If there is any leftover, this resource will be incorporated to improve the fiscal outlook," Guimaraes said.

"If we face a risk that fits within these BRL 20 billion, I can tell you we’re comfortable hitting the target. Of course, if something totally unexpected comes up in pensions, or something like that, then we’d really have a problem," he stressed.

After the last bimonthly report was released, Central Bank of Brazil Governor Roberto Campos Neto called the risk premium added to Brazil’s interest rate curve related to fiscal issues "exaggerated." (See MNI BRIEF: Market Reaction On Fiscal 'Exaggerated'-BCB Campos)