Opinion: Public investment is constrained by rising expenditures, not spending caps

The Union’s public budget, approved this week by Congress, includes the worst level of investment in the historical series: R$ 44 billion.

For a country where the lack of infrastructure is a clear barrier to growth –Brazil has a mediocre performance in the global rankings prepared by the World Bank–, the drop in public investment is bad news.

Part of this drop was well offset by private concessions. Even so, not every important project for the country attracts private resources. Empirical literature shows that public investment is important for growth (unlike public spending in general).

Where did public investment resources go? Is it the result of the merciless spending cap? No. It is the result of choices that society has made over the years. Let’s see.

Since 2016, the year prior to the establishment of the spending ceiling, expenditure on social security increased by R$141 billion, and expenditure on the civil service payroll by R$15 billion (already incorporating the 2022 budget amounts).

Together, these two items grew four times more than investments fell. Part of this increase could be avoided if the Social Security reform had been approved earlier, if a profound administrative reform had been proposed and approved in this period.

Another expense that grew substantially was parliamentary amendments. In 2016, BRL 4.6 billion were executed. In next year’s budget, R$ 37.7 billion are included. If we incorporate the R$4.9 billion of the campaign financing fund, we reach R$42.6 billion. It is an increase of R$ 38 billion, practically the same amount in which public investments fell.

Finally, it is worth noting the progressive increase in expenses arising from court decisions contrary to the Union (precatório). But these are not an economic policy decision (but a pendant of the past), and therefore I leave them out of the analysis.

It is clear that what prevented the increase in investments was not the ceiling, but the growth of other expenses. And it wasn’t just the investment that was losing ground. Between 2016 and 2021, expenditure on assistance programs – essential in a country with inequalities such as Brazil – dropped from R$ 171 billion to R$ 144 billion, a decrease of R$ 27 billion.

With the pressure generated by the pandemic, the ceiling rule was changed so that these social expenses were recomposed, reaching R$ 234 billion in the 2022 budget.

And why is the decision to raise the ceiling a bad one? As Brazil “rolls in the red” –we have had a primary deficit since 2013–, increasing spending means increasing the public debt. In a recent article published by the Millenum Institute, Bruno Funchal and Jeferson Bittencourt gathered evidence to show that countries with high debts grow less, and therefore generate less employment and income. Especially those countries with a high interest rate, like Brazil.

The public budget in Brazil was dominated by the growth of mandatory spending and spending directed by parliamentarians. The consequence is the compression of investment and the increase in public debt to accommodate the (necessary) social spending, compromising the country’s short and medium-term growth. Current and future generations pay the price.