Concern about the risks of the government feeding a fiscal time bomb has stressed Brazilian markets. But it is not only here that the discussion about the need to cut spending and achieve greater budget balance has gained a sense of urgency.
Nos USAthe wrinkles of economists and investors with a potential increase in the already high American deficit only increase in the face of the silence on the issue from the two presidential candidates, Democrat Kamala Harris and Republican Donald Trump. The relationship between US public debt and GDP already exceeds 120%. In financial terms, the amount exceeds the $35 trillion.
Despite being an issue rarely mentioned in campaigns, the billionaire John Paulsona Trump supporter, brought the issue to light when he put himself forward as a candidate for the position of Treasury Secretary in a possible Republican administration. The hedge fund manager told “The Wall Street Journal“ that he is the CEO of Tesla, Elon Muskwould work together to implement massive cuts in federal spending.
The mention of the founder of the electric vehicle brand was not by chance. Trump promised to put Musk at the head of a new “government efficiency commission” if elected on November 5th. The group would be created to advise on reductions in federal spending. The businessman recently stated that he would be able to cut at least $2 trillion of the budget, but without specifying how this would be done.
READ MORE: The US debt crisis is getting closer
Paulson cited as targets for cuts the green energy subsidies provided for in the Inflation Reduction Act, approved by the current government of Democrat Joe Biden. “All these tax subsidies for solar energy, for wind energy, are inefficient and economically unviable,” he stated. “Eliminate it. This reduces expenses.”
This legislation sanctioned in 2022 establishes tax credits for the purchase of electric vehicles, renewable energy, carbon capture and storage, hydrogen and nuclear energy. The tax waiver was offset by a government effort to increase revenue. But Trump said at the Economic Club of New York in September that he intends to “repeal all unused funds” from the law.
Removing clean energy incentives could save money US$921 billion over the course of a decade, according to the Tax Foundation. But this type of proposal may face resistance even among Republican congressmen. Many wind and solar energy projects funded by the law, for example, generate jobs and investment in party-dominated districts.
READ MORE: The US$100 trillion global time bomb continues to count down, warns IMF
High government debt is a problem that goes beyond the USA and Brazil. The International Monetary Fund (IMF) has warned about the escalation of global public debt, which is expected to reach a record high of $100 trillion this year. “Our forecasts point to a relentless combination of low growth and high debt — a difficult future,” said the agency’s managing director, Kristalina Georgieva.
In the same boat as the fiscal imbalance, the United Kingdom it also faces the challenge of rebalancing revenues and expenses to contain debt. British Prime Minister Keir Starmer needs to find 40 billion pounds to address the fiscal gap and, at the same time, maintain investment in areas such as health and education. To cover the gap, the proposals include increasing taxes and cutting spending.
Feeling of déjà vu in Brazil
The American and British dilemmas may seem familiar to Brazilians. And they are. Here, after the municipal elections, the government finally starts to address the issue of cost containment to maintain the goals established in the fiscal framework.
The Minister of Finance, Fernando Haddad, stated that the proposals have been discussed with President Luiz Inácio Lula da Silva, but there is still no defined deadline for them to be presented. He also stated that the measures will require a constitutional amendment project (PEC).
READ MORE: The American debt bomb. And her fragments in Brazil
The minister’s speeches have increased volatility in the market. On Tuesday (29), the announcement that there was no defined timetable for the presentation of the measures frustrated the market and helped to boost the dollar to R$5.76, the highest price since March 2021.
On Wednesday (30), another message transmitted by Haddad brought specific relief to the markets and the dollar closed practically stable, the R$ 5,7640 (+0.03%). The minister stated that there was “convergence” with the Civil House regarding the need to implement fiscal measures. The Civil House represents the most political wing of the government, that is, the one with the greatest propensity to defend increased spending.
The Minister of Planning and Budget, Simone Tebet, has reinforced communication about the imminence of the government presenting a plan to reduce expenses. The member of the economic team stated that President Lula already knows about the necessary measures.
Tebet even indicated a horizon for the approval of the projects. The minister set a deadline for voting on the package in Congress by the middle of the first half of 2025. “Something is voted on in December, another is voted on in March, another is voted on in May. What we need is to present a consistent, authorized package to the country, which obviously gives comfort to the President of the Republic, making it clear that we are not going to take away any rights.”
READ MORE: The alert came on: for the first time in 20 years, debt linked to Selic approaches 50% of the total
The expectation is that a first set of proposals can be presented next week. Tebet indicated that the plan would be proposed in two or more stages.
Brazilian debt trajectory
The trajectory of Brazilian public debt has been a source of concern among investors and other agents. From January 2023 to now, government debt has risen by 23.6%. R$ 7.2 trillion went to R$8.9 trillion. In the IMF’s accounts, this means that the relationship between gross debt and the country’s GDP will reach 87,6% at the end of this year.
The fund expects the indicator to rise to 92% in 2025 and reach 97.6% of GDP by 2029. Without a credible fiscal framework that puts this debt back on track to balance, interest rates continue to soar. Government debt securities with longer maturities, such as the Treasury IPCA+ 2045, for example, continue to pay real interest, that is, a return above inflation, around 6.76%. Two weeks ago, the rate was 6.57%.
READ MORE: Government debt creates opportunities in fixed income; private bonds already pay IPCA+9%
Such high interest rates inhibit productive investments, make credit more expensive, slow down the economy and, if they remain at these levels for long enough, can lead the country into a recession. For now, activity, employment and income have resisted. Until when? It will depend on the credibility that the government manages to gain. Here and, it seems, out there too.
