Brazil Goes on Spending Spree and Gets Worst Primary Surplus since 1991

Brazil importsSpending too much was the main reason for the worse primary account result, in Brazil, for the month of May since records began in 1991. The primary account (which consists of financial activities of the National Treasury, Social Security and the Central Bank, but does not take into consideration interest payments) came in with a surplus of 1.43 billion reais (US$ 793 million).

To put that in perspective, suffice it to say that the April surplus was 19.7 billion reais (US$ 10.9 billion). The May result, the worse in 18 years, led an economist at Tendências Consultoria, Felipe Salto, to declare that the government will be unable to reach its established target of a primary surplus of 3.3% of Gross Domestic Product (GDP) for the year of 2010.

According to Salto, it now looks like the government will end the year with a primary surplus of 2.63% of GDP. Even so, if the government is to comply with the Budget Guidelines Law (LDO), it will have to shave off about 0.7% of GDP from planned spending in its showcase development plan known as PAC (Accelerated Growth Program).

In order to obtain its primary surplus, the government has to either cut spending or raise revenue. In May spending outran revenue by a wide margin. Salto says it is discretionary spending that is the problem – such as PAC.

According to government figures, in the first five months of 2010, revenue has risen 17.9%, while spending was up 18.5%. Administrative costs of running the government rose 25.5%, while discretionary spending jumped almost 80%.

Salto says the problem can be kept under control, if it is brought under control quickly. But, if the deficits continue there will be severe mid-term and long-term consequences in public accounts, he points out. The economy is strong, but the May numbers are a warning, he says.

“For example, the loans the Treasury is making to the Brazilian Development Bank (BNDES) for PAC spending, are making the government’s debt bigger,” says Salto, adding that there will be a future problem with transparency if accounting legerdemain continues to be used with regard to PAC outlays.

This is important, says Salto, as it has a direct bearing on president Luiz Inácio Lula da Silva’s legacy and the future of the country.

“The presidential candidates should position themselves as soon as possible in favor of a serious commitment to fiscal responsibility and balanced budgets. And it seems that they have done so. But there must also be concrete action to maintain the primary surplus beginning on day one of any new administration.”

ABr

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