Record Annual Deficit for Brazil: Impact of Surging Expenses, Covid, and Court-Orders

Summary

  • An all-time 2.1% GDP deficit has replaced the 0.5% GDP surplus of 2022, making it the second-highest deficit recorded in the nation.
  • The December primary deficit of 116.1 billion reais was majorly influenced by the payments of 92.4 billion reais made to satisfy court-ordered payments.
  • Following a 12.5% rise in actual expenditures, the net earnings of the central government fell 2.2% in 2021.
  • If court-ordered payment impacts are discounted, the primary deficit would still be 138.1 billion reais, exceeding the initial projections of the socialist administration.

GDP Record Deficit

A previously recorded 0.5% GDP surplus in 2022 has been overturned by a massive annual deficit equal to 2.1% of the nation’s Gross Domestic Product (GDP). This represents the second-biggest fiscal discrepancy in the country’s history, second only to the financial year 2020 when government spending rose dramatically as a countermeasure to the Covid-19 pandemic.

Largest Fiscal Gap

A total deficit of 116.1 billion reais in December followed this record deficit, owing to 92.4 billion reais in court-ordered payments.

Constitutional Amendment

In 2021, the administration of the former President Jair Bolsonaro passed a constitutional amendment that enforced an annual cap on court-ordered payments, causing an unpaid backlog that was later addressed by the administration of President Luiz Inacio Lula da Silva.

Fiscal Calendar

The year’s deficit is a consequence of a 12.5% upsurge in real expenditures, while the central government’s net revenue, comprised of the Treasury, central bank, and Social Security, declined by 2.2%.

Impact of Court Ordered Payments

If the effects of court-ordered payments are discounted, the primary deficit for the year would sit at 138.1 billion reais, exceeding the early figures proposed by the leftist government, which had increased social spending.

Fiscal Plans

The new Finance Minister, Fernando Haddad, took office with an aim to limit the deficit to 1% of the GDP, or approximately 100 billion reais. The target, however, has become unachievable in recent months, as conceded by Haddad and his team.

The Silva administration, upon revealing new fiscal regulations, anticipated an even larger deficit of 0.5% of the GDP for the incoming year.

($1 equals 4.9093 reais)

The fiscal policies and their subsequent results are likely to cause instability in the forex market and impact trading, specifically on assets reliant on the Brazilian real.

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