Brazil’s Finance Chief Promises a Balanced Budget After Lula Skepticism

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(Bloomberg) -- Brazil Finance Minister Fernando Haddad reiterated his pledge to eliminate the country’s budget deficit next year, even after President Luiz Inacio Lula da Silva last week cast doubt on the importance of hitting the target.

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Lula’s dismissal of his economic team’s main goal — the zero primary deficit that Haddad laid out in his 2024 budget proposal in late August — sent markets reeling last Friday, as investors and analysts renewed their skepticism of the leftist leader’s fiscal plans.

Seeking to alleviate those concerns, Haddad on Monday acknowledged that the scenario had become increasingly “challenging” but blamed Brazil’s congress and Supreme Court, saying that Lula had expressed skepticism after hearing about the impact of tax benefits resulting from legislation and judicial rulings that have hurt federal revenue estimates and put the zero-deficit goal at risk.

“There is no lack of commitment from the president to the fiscal policy,” Haddad said, adding that he will pursue the goal as long as he is in office. “Now, I need political support. I need congress. I need the judiciary.”

Read More: Lula Says Brazil Unlikely to Hit 2024 Zero-Deficit Target (2)

Haddad’s comments did little to convince investors that the government would hit the target. Swap-rate contracts due in January 2026 surged as much as 44 basis points after the remarks. Traders also rushed to price in that the benchmark Selic rate will now end the current monetary-easing cycle at a higher level of near 11%. The central bank’s next rate decision is scheduled for Wednesday.

“Markets are still sensitive to fiscal developments in Brazil,” said Brendan McKenna, a strategist at Wells Fargo in New York. “Revenue forecasts may have been a little ambitious to start with.”

Haddad has already faced growing doubt about his ability to deliver on the pledge, especially as Brazil’s fiscal scenario has worsened. The primary deficit, which excludes interest payments, was 0.7% of gross domestic product over the past 12 months through September, according to Finance Ministry data. That compares with a 0.5% surplus at the end of 2022.

Read More: Brazil Needs Congress to Fix $33 Billion Budget Gap, Haddad Says

The Finance Ministry currently projects a deficit of 141.4 billion reais by the end of 2023, while Brazil’s gross debt will reach almost 75% of GDP.

Haddad told Bloomberg News in an interview earlier this month that Brazil was on track to hit the goal if congress did its part to help raise the 168 billion reais ($34 billion) in revenues his 2024 budget proposal projects he needs to close the gap.

The issues he mentioned to Lula included a bill approved by congress in 2017 that allows companies to reduce how much they pay in income taxes, which will have impact of 200 billion reais on revenue in 2024. The same year, the Supreme Court decided to allow companies to discount state tax payments when they calculated how much to pay in federal income taxes.

Haddad said Lula asked him to discuss the impact of those decisions with congress and the court to find a solution to the problem. If that doesn’t work, he said, the economic team could announce additional proposals to boost revenue.

--With assistance from Vinícius Andrade.

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