Brazil - Brazil Budget-- what will be cut?

http://www.bbc.co.uk/news/business-12412585 "Brazil pledges 50bn reais of spending cuts" (at today's exchange rate, that's about US$33 billion). Interest rates, which are already high (in comparison tothose in the U.S., at least), raised, in order to curb inflation. "Social spending and infrastructure projects will not be affected . . .", so perhaps the promised airport expansions/modifictions won't be sidelined, but that's the hope as of today, and leaves a lot to cut in other areas. There are a lot of infrastructure problems besides airports to be dealt with. Plus, time may get short for largescale projects to be completed, at least in time for the World Cup in 2014. Could still concerivably happen, at least for the highest priority areas (e.g., GIG?). Vamos ver. Up in the provinces, meanwhile, the city of Fortaleza has announced it has no money to fix the hundreds (thousands?) of potholes on the city's streets, and needs help from the state. It's still planning on hosting at least a couple of World Cup games. We're flying out Wednesday so will look to see if there are any signs of airport imrporvements yet.

You probably will not see improvements yet :)

This morning the news was of cutting in numerous administrative areas, including an already imposed hiring freeze, cuts in T&E budgets for ministries etc.

There is a reaffirmed commitment to not cut the PAC (much of the infrastructure planned will come from here) budget.

As you say, vamos ver. This thread will be a good place to put the daily updates and debates. This will not be without strife.

Announced budged cuts were, to this day, in my view, midiatic events only.

I'm sorry, fellows, for sounding so negativistic, when you are so much more optimistic than me; I sincerely hope that future events prove that I am wrong . . . But, until then:

In Brazil, as opposed to the US, the budget approved by Congress is only an authorization for the federal government to expend the monies in the designated projects; there is not a guarantee that the approved projects would be executed - this decision is left to the executive branch, not the legislative (this is reminiscent from the period in which the very high inflation rates made the elaboration of any annual budget a piece of fiction, as both taxes to be received and costs of any projects are impossible to be predicted).

The budget for 2011 was approved with a substantial expansion over that for 2010, the cuts so far announced have cut only part of that expansion. Besides, until executed, a budget exists only on paper. Expenditures are always contingent upon something: funding/tax collecting, political decision/bargaining, . . . To my knowledge, a budget has never been executed in full.

Were the "cuts" innocuous? No, not at all. They signalize a desire to curb spending expansion but they were not really spending cuts. As both of you said, Vamos ver!

PS: Please tone down your expectations: airports/infrastructure is not a priority, much less a high one. These people are politicians, their only interests are in their careers, their only mirror is public opinion (on a macro level), we are not relevant to them

Were the 'cuts' any different than anywhere else, bar Greece, say, then your pessimism should be applauded. However, even these tiny steps are the first positive indications in eight years. Do you not agree?

They signalize a desire to curb spending expansion but they were not really spending cuts.

Was most of this not brought upon themselves by offering credit to a wider section of the population?
I get the impression everyone went on a spending spree because of this.

Hiddy, there are two processes here:

i) Government spending: This is the one whose expansion it is proposed to be curbed. While it is true that this spending eventually (over)stimulates the economy, it is particularly dangerous here because Brazil already runs a massive fiscal deficit, even before the expansion, even after any possible cuts. This deficit, as in the US, is financed through emission of debt and, worldwide, the debt markets are becoming wary about the political and financial capacity of governments to pay off their debts, which makes everyone nervous, in a self-reinforcing spiral.

ii) Consumer lending: This is the credit offered to a wider section of the population. In a "normal" country, the risks of credit offered to the consumer would be the responsibility of private lenders; this would have nothing to do with government, but in Brazil . . .

ii.i) In 2008 Lula, overriding technical decisions from Banco do Brasil and Caixa Econômica Federal, ordered these (state owned) banks to offer consumer credit cheaper than the then market rates, in an attempt to artificially lower interest rates (yes, interest rates in Brazil are very high, but unfortunately there is a reason for it - a little bit complex and too long to present here, but related to very high costs for recuperation of bad credit, when and if possible). So, state owned banks are in line for consumer credit risk also . . .

ii.ii) Last month, Banco Pan-Americano get caught in a massive credit fraud (for its size). Instead of being folded, it was bailed (with resources from an entity like the US FDIC). It was not even considered "too big to fail", as it is a very small bank, but six months earlier Caixa Econômica Federal bought a 40% participation for a very high value, and it was considered politically necessary to save this bank or else . . .

So, Hiddy, we have an increase of government spending (potentially to be curbed), an increase in consumer credit (not yet challenged, but in the process of doing it, by Banco Central's interest rate increases) and some potential problems with the quality of credit offered by or involving state owned banks.

JB, Dilma is way better than Lula until now; I have commented more on my reply to Hiddy's post.

(But this says much more about Lula than about Dilma until now).

(But this says much more about Lula than about Dilma until now).

Indeed it does. The old expression "it is better to be lucky than to be good" applies to Lula. he luckily did not discontinue the major policies of FHC so the economy did well once it was clear that he would not suddenly move to the far left.

Still we are left with a situation very comparable economically to that left in the US by Ronald Reagan. Unrestrained Federal spending led to a huge overhang of debt but euphoria domestically.

The big difference of course was that Reagan cut taxes for rich people. Brazil does quite nicely for the rick also, even though everyone excoriates the bureaucracy, infrastructure problems etc. with complete justification.

As a dual citizen US/Brazil I find it always instructive that every year i owe a large check to the US IRS (in Brazil we pay by electronic means) because the Brazil taxes are so much lower than the US ones are. People insist that is not true and quote absurdly misleading data. The reality is that the maximum ordinary income tax rate in Brazil, is 27.5% vs 35% in the US. Investment and interest income have individual formulae in Brazil but never is the tax more than in the US, almost always less. Even my property tax is roughly 47 mills on an assessed value that is about 1/5 the current market value.

Part of the problem in Brazil is a very regressive tax system that still consumes an absurdly high percentage of GNP, coupled with astronomic real interest rates that enrich the lenders at the expense of everyone else. I own lots of Brazil Treasuries so I personally love the system. The side cost is personal borrowing rates that generally exceed 100% APR, except for cars and mortgages, which still cost 35% APR or so.