A higher tax take isn't keeping pace with Lula's spending in Brazil

Brazil's economy is picking up and the government's tax take is rising. It still isn't enough to restrain the nation's growing debt load.

As our chart shows, the federal government's revenue increased year-on-year in real terms for a fifth straight month in May. But the primary deficit (revenue minus non-interest expenditures) widened again, surpassing 305 billion reais on a rolling 12-month basis. It's a reversal of the trends a year earlier, when the government was running a substantial primary surplus.

Brazilian GDP growth accelerated to 2.5% in the first quarter of 2024, up from 2% in the previous two quarters. The natural increase in tax revenue that resulted was bolstered as the government wound down a program of temporary relief on fuel taxes.

Still, as we see in our second chart, year-to-date non-interest expenditure has now surpassed government revenue. This raises doubts about whether the federal government will achieve its fiscal goal of a primary balance of zero this year.

As we wrote earlier this year, President Luis Inacio Lula da Silva's spending plans had already boosted Brazil's debt-to-GDP ratio. The recent deadly flooding, meanwhile, added a hefty bill for humanitarian support and reconstruction.

These fiscal trends shine a light on Lula's public clash with his central bank governor, Roberto Campos Neto – an appointee of the president's right-wing predecessor, Jair Bolsonaro. Lula would like lower rates, but Campos Neto recently paused a year-long rate-cutting cycle. The central bank has said that the government's expansionary fiscal policy could counteract the effects of monetary policy aimed at reducing inflation. (Lula will appoint the next president of the central bank at the end of this year.)

Amid this backdrop, the nation's currency has depreciated about 14% against the dollar so far this year.

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