If the squeeze in monetary policy makes the government more interest rates are not expected to be the central bank (BC), which pursues an inflation, not debt, stop Selic. But that the government, within its reach, helps the BC to control inflation as much interest as possible. This is the path advocated by economists consulted by Estadão Content, which has also been publicly defended by the economic team, including Finance Minister Fernando Haddad.
In the market evaluation, cavalry doses of tax stimuli, now followed by credit measures, compromised the effectiveness of monetary policy because it helps to support consumption and stress caused in investors in relation to the debt trajectory. As a result, the BC needs to rise interest to hold inflation, having as a side effect a heavy impact on the service of public debt.
Other than that, injections of money in the economy, contrary to the intention of the monetary authority to raise interest charged between banks, oblige the BC to dry liquidity with more committed operations. The sale of government bonds with compromise of repurchase on a future date enters the calculation of the debt.
BTG Pactual Economists, led by former Treasury Secretary Mansueto Almeida, estimate that 2% of Gross Domestic Product (GDP) be reserved for interest payment-the so-called primary surplus-public debt could stabilize at 90% in 2034. In the current tune, in which the government still spares a penny to pay interest, the market does not see the debt in the next eight years, coming to go from 93% in 2033.
“When it makes the primary result, the government, instead of debt when the debt wins, pays a piece of debt to what it saved. In this case, fiscal policy helps generate expectations of sustainability, which makes the interest rate fall as well as to slaughter debt over time,” says Jeferson Bittencourt, former treasury secretary and today, boss of macroeconomics. “Without a dynamic that leads to a primary surplus earlier in relation to expectations, debt growth will be very accelerated,” he adds.
With the luggage of those who have had a seat in Copom, at the time when he was the BC economic policy director, Itaú Unibanco’s chief economist, Mario Mesquita, argued two months ago that Brazil will only have interest at civilized levels to rescue the spending roof rule, implemented in the Michel Temer government and replaced by the current tax arcard. Within the same spirit of squeezing the belt to correct fiscal imbalance the revenue given on Saturday last Saturday by former BC President Armínio Fraga is to freeze the minimum wage to which social security floors are linked.
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Following the impeachment of former President Dilma Rousseff, when the country lived a recession of both political and fiscal origin, the rule that prevented increases in public expenses above inflation replaced interest payments, which were 8.37% of GDP in 2015, to below the historical average in just three years. By 2018, interest already cost less than 6% of GDP for the public sector.
The reissue of the spending ceiling is completely discarded by the current government, whose economic team considers the rule unfeasible to a budget stifled for mandatory spending, which grow at a rapid pace. And taking into account the expectations that the public sector will continue to spend more than they raise for at least three more years -without the prospect of new structural measures in the short term -there seems to be an abyss between the current situation and the generation of primary surpluses needed to balance the debt. The fiscal tightening to stop the debt goes from R $ 300 billion.
Nevertheless, a clear signage that, before loosening rules, there will be political commitment to the fiscal adjustment agenda – in order to remove fears about the government to enter the “election mode” – it would be a good start to rescue the credibility of fiscal policy and mitigate the risk awards charged today by the market.
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“Having lower interest rates goes through a government that spends less as well. If you have credibility, things are feedback. With 10% real interest rates, any country in the world will have a fiscal problem, regardless of its growth. But the fiscal contributes negatively to this framework, and it is a lot for the loss of credibility of the framework,” says Pedro Schneider, expert in public accounts of Itaú Unibanco.
According to Warren Investimentos’s chief economist Felipe Salto, the Treasury option to deal with risk aversion in the market by issuing more post-fixed titles helped finance the government efficiently. However, amendment, the strategy has a cost to the Central Bank, as the highest return obtained by holders of these roles in Selic’s discharge contributes to stimulate aggregate demand, impairing monetary policy.
“Interest needs to be even higher to compensate for this pressure. At the same time as it allows the Treasury to have an important instrument in times of distrust, it also imprisons the debt management model to a type of paper that pollutes monetary policy management, generating direct and high tax costs,” says Salto, who has been executive director of the independent tax institution (IFI) and secretary of the São Paulo State Finance.
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“Debt management will only improve, with time stretching and reduction of average costs, when we definitely move on the fiscal adjustment agenda,” concludes the economist.
