Brazil & Southern Cone - December 2010 (ISSN 1741-4431)
BRAZIL: Mantega promises a "heavy hand" in 2011
On 24 November, the finance minister, Guido Mantega, confirmed in his post for another term by President-elect Dilma Rousseff, said he would oversee some R$20bn (US$11.6bn) in budget cuts in 2011 and said he had been given a mandate by Rousseff to take an axe to public spending. Rousseff's economic team suggests strong continuity with the existing market-friendly policy tripod of inflation targeting, primary fiscal surpluses and a (managed) free-floating currency. A confident and assured Rousseff is saying all the right things.
Mantega also said the new government would reduce its transfers to the national development bank, Bndes, by some R$50bn (US$29bn). Mantega has been painted as a free spending statist, but for weeks now he has been signalling a shift away from the recent expansionary fiscal policy, with the state stepping back to allow the private sector to take up the economic running. In 2008 and 2009 the federal government transferred some R$200bn (US$116bn) annually to Bndes in order to prop up domestic credit during the global economic crisis. Rousseff has now acknowledged that public spending needs to come down in order to lower the pressure on interest rates (and the currency) and these latest moves represent the first clear signal of fiscal retrenchment in 2011. It comes at an opportune moment - latest data put mid-November inflation at a five-month high of 5.2% year-on-year, on surging food prices. Moreover, the latest (October 2010) primary fiscal surplus result was the weakest since December 2001 (see sidebar).
Dilma had promised to retain the current fiscal targets and aims to reduce the public debt burden to 30% of GDP by 2014, from the current 40%. On 18 November, however, the Lula government sent down to congress a bill to reduce the primary surplus target to 3.1% of GDP, from 3.3%, in 2010 and 2011. The proposal follows a treasury decision to remove the state firm Eletrobrás from the primary surplus calculations. It previously stripped out Petrobras. The idea is to gradually remove all state firms. Investments by these entities count as primary expenses and so weigh negatively on the fiscal result. By removing them, the government can thus reduce its primary surplus target. Opposition economists reject the official argument that this allows for greater transparency and dismiss it as 'creative accounting'.
These same critics are equally concerned about Mantega's proposal to “purge" the national IPCA consumer price inflation index of some food and energy items. Mantega argues that such a move (which would reflect the US Federal Reserve) would allow for a reduction in the central bank's targeted inflation range and thus reduce the pressure for high interest rates. He has long argued that the bank is forced to overreact to transitory price movements triggered by external shocks; global food prices are regularly impacted by temporary climactic conditions for instance. Mantega accepts that the reform might make it more difficult to identify structural changes in food and fuel prices, but he points out that the central bank's monetary policy committee, Copom, works with multiple inflation indices. Notably, Mantega will sit along with the new central bank president Alexandre Tombini, the new planning minister Miriam Belchior (and five others) on the Copom. The Dilma government will set the 2012 and 2013 inflation targets in June 2011. Meanwhile, Tombini may be forced to risk Mantega and Dilma's wrath by lifting the benchmark Selic interest rate from its current 10.25% as soon as he takes office in January. Tombini said on 24 November that Dilma had promised him “full autonomy" to control inflation.
- Fiscal decline continues