Government revises yearly inflation from 6.2% to 8.4%, and account is expected to strangle 2022 Budget

The Ministry of Economy revised on Thursday (16) the official projection for the INPC (National Consumer Price Index) at the end of 2021 from 6.2% to 8.4%. The worsening in the indicator puts pressure on the spending ceiling, which limits government spending, and should cause a strangulation in 2022 accounts.

The folder’s report maintained the estimate for this year’s GDP (Gross Domestic Product) at an increase of 5.3%.

To formulate next year’s Budget project, sent to Congress at the end of August, the government estimated that INPC would be 6.2% in 2021. The projection was considered outdated by members of the Ministry of Economy and also by the market, which already expected a higher result, above 8%.

For each additional 0.1 percentage point of INPC, the government estimates that its expenses would increase by R$790 million in the year. This is because public expenditures, such as pensions and pensions, are adjusted for inflation.

Therefore, updating the projections should represent an additional expense of R$ 17.4 billion in 2022.

The problem is that next year’s budget was drawn up taking up the entire space of the spending ceiling. Therefore, increases in projected expenses need to be offset by cuts in other areas.

The Economic Policy secretary at the Ministry of Economy, Adolfo Sachsida, denied that the 2022 Budget will be made unfeasible and said that there is no risk to the functioning of the public machine. According to him, the government will respect the ceiling rule and promote a cut in expenses to accommodate this excess spending.

“What will happen with the increase in the INPC is that mandatory expenses will increase, and we will naturally reduce discretionary expenses,” he said.

The secretary, however, did not explain how this will be done so as not to harm the provision of public services.

“There are some points that still need to be addressed. We need to check how the PEC (Proposed Amendment to the Constitution) of the precatoria will be addressed. Once resolved, we will be able to address this budgetary issue more clearly,” he said.

President Jair Bolsonaro wants a new social program, called Auxílio Brasil, with a budget of approximately R$ 18 billion above what Bolsa Família currently has. The extended program was not provided for in the Budget for lack of space.

The tightening of accounts was driven by the explosion of the precatório account — government debt recognized by the courts and without the possibility of recourse. This expense jumped from BRL 54 billion this year to BRL 89 billion in 2022.

To solve the problem and find space for the new Bolsa Família, the government hopes that Congress will authorize the installment of a portion of your court debts. With the measure, the Executive intends to reduce the expenditure forecast for 2022 by R$ 33.5 billion.

Researchers’ estimates indicate, however, that the government may find it difficult to find resources for the social program even if it manages to cut spending on court orders.

The Ibre FGV (Brazilian Institute of Economics of the Getúlio Vargas Foundation) estimates that the INPC will end the year at 9.1%. In this scenario, the draft Budget needs to be adjusted, foreseeing an increase in government spending of almost R$23 billion.

In other words, from the slack in the Budget after the postponement of court orders, R$ 10.5 billion would be left over — less than the government’s plan for the new social program.

In addition to spending in the social area, Bolsonaro hopes to use the space in the accounts for other popular measures in an election year, such as readjustments for civil servants and public works.

Therefore, the acceleration of inflation compromises the government’s expectation to obtain a budget relief whose objective is to obtain money for expenses with an electoral bias.

In this Thursday’s presentation, Sachsida criticized market estimates that the Brazilian GDP could grow by less than 1% in 2022.

Government accounts point to a 2.5% increase in activity next year. According to the secretary, a quarterly growth of 0.4% until 2022 is enough to achieve this goal.

He stated that, considering this year’s carrying effect, for 2022 growth to be 0.5%, the economy would have to present a negative average quarterly growth of 0.1%, which is not on the government’s radar because of the acceleration of the recovery of the services sector.

“More important than the growth number is the quality of growth, Brazil is tired of chicken flights. Our objective with economic reforms is to promote sustained growth, not short-term immediate results”, he said.

Although Minister Paulo Guedes (Economy) has stated that the “political noise” prevents the dollar from falling and that the equilibrium exchange rate should be close to R$4.00, the government’s report did not reflect this assessment.

According to the bulletin released on Thursday, the dollar level should remain above R$ 5.00 at least until 2025. The folder informed that this projection is not made by the government, being only collected from market projections.

For the IPCA (Extended National Consumer Price Index) the ministry revised the projection for this year from 5.9% to 7.9%. The inflation target for 2021 is 3.75% with a maximum limit of 5.25%.

“Inflation is the greatest enemy of the poor population. I am sure that monetary policy and fiscal policy will fight inflation because this is not a matter of ideology. We will do what is necessary to fight inflation,” stated the secretary.

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