Further Budget Cuts

Guido Mantega, Finance Minister

Further Budget Cuts

Late last week the Ministers of Planning and Finance announced that due to avoid the overheating of the economy, the government was cutting the budget by a further R$ 10 billion. The budget had been cut in March by R$ 21.8 billion. The major concerns of the government were the revision upward by most economists of the economic growth rate for 2010, above 7%. Mantega indicted that the economy in the first quarter was growing at a rate of between 8 and 10% per annum, a rate which is above the actual productive capacity of the Brazilian economy. The action taken by the government was an attempt to keep the rate about or below 7%. The readjustment of the minimum salary by 9.7% was expected to have a strong effect on consumption capacity and, on inflation.

The government has the choice of raising interest rates, or cutting its own expenses, and in the last few weeks has done both. At the April meeting of Banco Central`s committee on monetary policy (“Copom”), the Selic rate was raised from 8.75% to 9.5%. However, the news of the cuts was greeted with cynicism by some observers who noted the Treasury`s recent, confident presentation that the Government’s first quarter primary deficit could be reverted easily, and took these cuts as being evidence that the balancing of the government budget would not be so easy.

The cuts are made in future expenses, not yet detailed, and therefore the question of when these cuts will come into effect to reduce consumption is being discussed. For instance, it must not be forgotten that we are in a Presidential election year where the interest of the government is probably not in reducing consumer activity inordinately. Thus, doubts as to whether the cuts will affect economic growth this year have also caused economists to wonder whether interest rates would be further increased to combat inflation.

Other commentaries have suggested that a cut of, so far R$ 31.8 billion in government spending is too little too late to affect government expenses this year. The amount of R$ 40 billion was being suggested as the necessary amount of cuts, but that was tow months ago.

The position of the Brazil’s recovery from the World economic crisis has left the country with a number of weaknesses, notwithstanding an exemplary performance. Those weaknesses include burgeoning inflation, difficulty in balancing government accounts within projected goals, and a weak export sector.