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Brazil: Brazil presents 2016 budget, forecasts primary deficit for first time in over 15 years amid economic gloom

September 10, 2015

For the first time in its modern history, Brazil’s government presented a budget with a primary deficit to Congress on 31 August, highlighting the country’s shaky financial situation. The 2016 draft budget sees a primary deficit of 0.5% of GDP or BRL 30.5 billion, which starkly contrasts the 0.7% surplus that had been projected in July. Brazil tallied its first primary deficit in over a decade last year and the budget is the first since before 2000 to forecast a deficit. Moreover, some analysts have questioned the legality of the deficit as it could be interpreted as breaking the fiscal-responsibility law passed in 2000. The budget contains a 5.8% rise in total revenue in 2016 with BRL 11.2 billion in revenues from new tax increases and BRL 37.3 billion from asset sales and concessions. Expenditures are expected to rise by 9.5%, largely driven by mandatory increases in spending which are anticipated to total BRL 960.2 billion. Congress has until the end of the year to review and pass the budget.

The budget confirms that the government’s efforts this year to correct the country’s sinking finances have come up woefully short. The government has faced a host of setbacks to its austerity measures and reform agenda, which has hindered its ability to balance the books. Corruption scandals have eroded the government’s support in Congress and led to the watering down or stalling of key legislation. In the latest setback, a lack of support in Congress led President Dilma Rousseff to scrap her planned reinstatement of a tax on financial transactions, which would have added BRL 80 billion in revenues next year. Some market analysts have speculated that the drastic revision to fiscal targets in the budget may be designed to help shore up support for austerity measures.

At the heart of the budget’s deficit prediction is the country’s economic slump. Brazil entered technical recession in the second quarter of the year due to a deterioration in both domestic and external demand. Corruption scandals have pushed confidence levels to record lows thus hampering private consumption, while subdued external demand and low prices for commodities are weighing on the country’s external sector. In addition, government revenues have plummeted due to falling tax revenues, inflation reached an almost 12-year high in July and the country has been downgraded to junk status by Standard & Poor’s. The poor economic environment led the government assume economic growth of a meagre 0.2% in 2016 and to project inflation of 5.4% in the budget.

At this point, Brazil’s future is clouded with uncertainty. Weaker-than-expected economic performance or prolonged political gridlock could threaten the government’s budget assumptions or stall measures designed to shore up the economy. Taking this into consideration, LatinFocus Consensus Forecast panelists have revised their forecast for Brazil’s fiscal deficit. The panel now expects the fiscal deficit to tally 6.7% of GDP in 2015, which is a 0.1 percentage point larger deficit than last month’s forecast. For next year, the panel sees the deficit narrowing to 5.6% of GDP.


Author: Angela Bouzanis, Senior Economist

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