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The Central Bank emphasizes that a policy of containing public spending can be an inducer of economic growth in Brazil. The strategy, defended by Copom, proposes a structural reduction in expenses to mitigate interest rates and encourage long-term development. Resistance, however, persists among government policy areas.
It is possible that a change in public spending behavior could boost Brazilian economic growth more effectively than other isolated measures.
With permanent spending cuts, Brazil would have more capacity to encourage an expansion scenario Valuation. This is what the Central Bank (BC) signals in its most recent Monetary Policy Committee (Copom) report, suggesting that fiscal control may benefit the country in the coming years.
The BC highlights that structural containment of expenses can have positive effects on country risk, financial conditions and resource allocation, decisively influencing the pace of the economy.
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This topic is particularly relevant, as the federal government is discussing internally how to proceed in relation to public spending, a subject that generates debates between ministries and encounters resistance from political wings and sectors linked to social programs.
How the BC justifies spending cuts
The Central Bank's analysis is part of the minutes of the last Copom meeting, held on September 6. At that meeting, the committee decided to increase the Selic rate to 11,25% per year – the second consecutive adjustment.
According to Copom, the reduction in spending could ease bank interest rates, which would increase the credit available for consumption and business investments..
As a result, productive sectors would have greater access to financing, a factor that could contribute to economic expansion in the medium term.
For the Central Bank, economic growth would occur thanks to reduction of pressure on public debt and improvements in financial conditions, risk premium and resource allocation.
The agency's conclusion is that, with more controlled spending, the country could avoid additional increases in the Selic rate, giving growth a boost.
Fiscal policy and fighting inflation
Another point raised in the Copom minutes is the relationship between public spending and inflation. According to the Central Bank, the increase in spending exerts inflationary pressure alongside a scenario of heated economic activity and a dynamic labor market.
Copom argues that, to combat inflation effectively, the government must adopt a predictable and transparent fiscal policy, reinforcing its commitment to fiscal targets.
“Compliance with the fiscal framework and surplus rules are important elements for anchoring inflation expectations,” Copom highlighted.
This control of public accounts, conducted by the Ministry of Finance and the Ministry of Planning, seeks to avoid fiscal mismanagement and excessive growth in public debt – which could require new increases in interest rates.
Debt and high interest rates in Brazil
BC president Roberto Campos Neto, who leaves office at the end of 2024, has already highlighted that Brazil's high level of debt is one of the factors influencing interest rates.
Campos Neto states that Brazil's high level of debt, compared to other emerging economies, contributes to the higher cost of credit.
As he explained, this situation means that the BC needs to adopt a more restrictive interest rate policy to control inflation and keep the financial market stable.
Decisions on Selic and the impact on the economy
Decisions on the Selic rate, influenced by future inflation projections, reflect the Central Bank's role in anticipating economic trends.
This anticipated effect is necessary because changes in the Selic rate take six to 18 months to fully impact the economy.
The inflation target set for 2024 is 3%, and the BC is keeping an eye on meeting this index for the coming years.. Recent financial market estimates, according to the Portal G1, project that inflation in 2024 will reach 4,62% – a rate above the central target.
From 2025 onwards, the 3% target remains, with a tolerance of 1,5 percentage points up or down, which allows a variation of 1,5% to 4,5% without non-compliance.
Challenging scenario in the short term
According to the Central Bank, the inflationary scenario for the coming months presents additional challenges. prolonged drought that affects food prices and the appreciation of the dollar are some of the factors that consistently put pressure on inflation.
The Central Bank also notes that inflation in services, the sector with the greatest inflationary inertia, remains above the ideal level. This reality, combined with the heated pace of economic activity, makes it even more difficult to achieve the inflation target.
International uncertainties
Copom also pointed out that the international scenario remains unstable. The US economy, for example, still faces uncertainty about the slowdown and the pace of disinflation., which influences global monetary policy and affects Brazil.
If the Federal Reserve decides to keep interest rates high in the US, the dollar will tend to appreciate against the real, negatively impacting inflation control in Brazil.
The appreciation of the dollar in the Brazilian market, the volatility of the stock market and the increase in the risk premium reflect these uncertainties..
Thus, the Central Bank remains attentive to the pace of domestic economic activity and international policies, seeking to adjust the Selic rate according to the evolution of the scenario.
The role of economic activity and the labor market
The BC analysis also highlights the influence of the labor market on inflation behavior. With a buoyant labor market and the expansion of credit to families, consumption and aggregate demand remain strong, favoring economic growth.
However, the entity reinforces that these factors also bring challenges to inflationary control, as they generate pressure on the prices of services and products.
Based on all these points, the central bank will continue to closely monitor economic dynamics, especially with regard to growth rate and the convergence of inflation to the target established by the government.
The expectation is that the combination of a credible fiscal policy and an assertive monetary policy can stabilize the economy in the coming years.
And you, do you believe that controlling public spending could be the solution for economic growth and reducing inflation?
Yes, in the gradual and constant reduction of the VALUE of the general Brazilian public debt, even though it is tiny.
How do you balance a family's finances? By cutting expenses! Until you find a balance, but politicians don't want to give up their perks with super salaries and so many perks that only take salaries from one thing to the next. Why provide health care for those who can afford a plan? Why provide housing assistance for those who already have a house? Why provide a suit allowance? And so on... when politicians live by vocation and not by ambition, maybe Brazil will change.