Government spending including interest grows again and exceeds pre-Bolsonaro level

After the significant drop caused by the end of extraordinary expenses linked to Covid in 2020, the Jair Bolsonaro government’s (PL) expenditure including interest grew again and reached 34.14% of GDP (Gross Domestic Product) at the end of the first quarter.

The level exceeds that observed throughout 2018, in the government of Michel Temer – showing that the Bolsonaro administration currently registers a higher expense than when he took charge of public accounts.

The figures were published this Friday (15th) in the National Treasury bulletin on government fiscal statistics for the first quarter. Compared to the same period last year, there was an increase of 5.35 percentage points.

According to the Treasury, the main factor behind the observed increase in expenditure is the increase in interest payments, which rose from 6.13% to 9.14% of GDP in a one-year period.

This increase reflects the monetary tightening promoted by the Central Bank, which began in March last year, when the basic interest rate (Selic) was at 2% per year, the lowest level in history.

Since then, it has gone through nine consecutive highs and reached 11.75% per year at the end of the first quarter. Today, the Selic is set at 13.25% per year. Rising interest rates impact the amount the Treasury needs to pay investors.

“The cost of debt follows, in a way, this rise [da Selic]which has been happening due to inflation in recent months”, says Pedro Ivo Ferreira de Souza Junior, general coordinator of economic-fiscal studies.

The scenario has made the government pay the highest fees on the issuance of new public debt securities since the end of the Dilma Rousseff (PT) government, removed from office in May 2016 in an impeachment process.

Ten-year NTN-Fs (National Treasury Notes – Series F), for example, were issued with interest of 13.4% in the auction last Thursday (14). The rate is the highest since April 7, 2016 (when it stood at 14.2499%) — on the eve of Dilma’s removal.

The higher fees charged by the Treasury are largely due to the worsening perception of risk by investors, who charge more to finance the government.

The expansion of the public debt stock itself also increases spending – a movement resulting from the imbalance between revenues and expenditures. To cover the hole in the accounts, the country seeks more loans and the size of the debt exceeds R$ 5.7 trillion.

In addition to interest expenses, the expansion of social benefits boosted government spending in the first quarter, especially with the payment of Auxílio Brasil.

The transfer of the amount of R$ 400 to eligible families enrolled in the Single Registry began in November last year, replacing Bolsa Família and succeeding the Emergency Aid paid during the Covid-19 pandemic. In 2021, the average benefit amount was BRL 250.

In the first quarter of this year, the share referring to social security and social benefits in the government expenditure account corresponded to 12.93% of GDP, compared to 11.62% in the same period in 2021.

Transfers made by the government to states and municipalities also help in this calculation, considering the improvement in collection in 2022, with emphasis on the increase in taxes on income, profits and capital gains.

For the next quarters, the increase in government spending on social benefits tends to grow after the approval of the PEC (proposed amendment to the Constitution) that boosts the granting of aid less than three months before the elections.

Among the measures foreseen by the PEC are the raising of the Auxílio Brasil floor to R$ 600, the creation of a monthly allowance for truck drivers of R$ 1,000 and the doubling of the Auxílio Gás amount to around R$ 120. The total cost estimated is R$ 41.25 billion, above the R$ 38.75 billion originally signaled.

Treasury officials do not yet measure the direct impact of the PEC on future government expenditures. But Minister Paulo Guedes (Economy) said on Thursday (14) that the country’s fiscal situation will not be harmed.

“We have unbudgeted extraordinary revenues and we have unbudgeted extraordinary revenues, around R$57 billion, which exactly cover the PEC of R$41 billion, plus the tax reduction of around R$16 billion”, said.

Furthermore, the new outlook for GDP this year tends to improve the spending indicator. In recent days, the government has raised the country’s growth forecast from 1.5% to 2%.

On the other hand, the increase in interest rates will continue to be a reality throughout the year in reaction to high and persistent inflation. In June, the IPCA (Extended National Consumer Price Index) reached 11.89% in the 12-month period.

In this context, the BC signaled, after the last Copom (Monetary Policy Committee) meeting, in May, that the monetary tightening cycle is not over and indicated the strategy of keeping the basic interest rate at a high level for longer.