Economic analysts across Brazil have been releasing reports to warn about the economic risks the future government will likely face next year. For instance, Deborah Bizarria, a specialist in economy, has recently published an article in “Congresso em Foco” talking about this issue. Like her peers, she sees a moment of relief in the economic scenario caused by some factors. First, the fall in the unemployment, which has returned to pre-pandemic levels. Then, a decrease in the inflation rate measured by the Consumer Price Index (IPCA), strongly influenced by the fuels prices for the general public and cargo vehicles. However, for Bizarria, this positive moment has its days numbered.
Side Effects of Populist Measures to Win the Election
For the economists, the limited life expectancy of this improving scenario is explained by the measures approved that increase public spending to guarantee reelection, whose negative effects will be felt as of next year, when these measures come to an end. Many policies that do not generate lasting growth but cost a lot of public money. A notorious example is the PEC Kamikaze (EC 123/22), which masked several benefits behind the R$200 increase in Auxílio Brasil to reduce poverty, among them: aid for taxi drivers and truck drivers, transfers of resources to states and cities to subsidize public transport and exemptions for the ethanol sector.
Impact on Inflation
In order to accommodate these expenses, several measures were approved that “flexibilize” the Federal Government’s budget limit. This hampers the predictability of public debt growth and without this mechanism of fiscal control, state will have a harder time to show it is able to honor its debts, which consequently increases the pressure on interest rates – making it increasingly difficult for the Central Bank to control inflation.
So, Why Is Inflation Falling Now?
The IPCA accumulated in 12 months reached the highest level since October 2003. However, in the last months, there was a reduction in this index and a consequent a reduction in inflation expectations for this year and for 2023. Still, this result is due to a series of tax exemptions that are not sustainable on the long term and would have the objective of creating a good scenario during the elections. Therefore, with the increase in Auxilio Brasil and other programs and oil becoming more expensive, it is difficult for the downward trend in prices to continue. It may even reverse, affecting the most exposed part of the population, the poor. A part of this group, who was temporarily included in the list of beneficiaries may not be receiving the social aid anymore, and the remaining families may not have the extra amount of R$ 200 any longer, since it is due to end in December.
Political Barriers
For Bizarria, the president who takes office in 2023 will have an arduous task. To stabilize the economy, the elected leader is going to face a strong Congress with a large opposition, which may put obstacles to reforms and the reduction of public debt, necessary for a consistent growth, to create jobs and improve the living conditions of the poorer.
