Public spending can generate inflation, according to Institute


Source: DCI, 25/09/2007

At the pace at which they are moving, public administration spending can have serious impacts on the country's inflation rate. The alert was made in the bulletin of the Institute for Applied Economic Research (Ipea), which makes an assessment of the current Brazilian economic situation and outlines prospects for the next few years. In the first seven months of 2007 alone, Central Government expenses grew 9,4% over the same period last year. According to experts, if the real rate of change in public spending does not decrease next year, Brazil is at serious risk of having to live with an inflation of around 5% between 2009 and 2010.

Rising prices, which hit consumers' pockets in full, are often influenced by changes in the exchange rate and interest rates. In recent times, however, another variable has contributed to this growth, which worries the economists of the Conjunctural Monitoring Group (GAC) at Ipea: the intensity of the increase in public spending. The problem is that, since 2004, the so-called primary government expenditures (which do not include financial expenses, such as debt rollover, for example) have grown at real rates of almost double digits.

To give you an idea, only in the first seven months of 2007, primary federal expenses reached R $ 238,6 billion, that is, R $ 27,2 billion higher than in the same period last year. The difference would be enough to cover, for example, practically all the expenses foreseen for the Ministry of Education in 2007 (R $ 27,5 billion). The increase occurred in a generalized way, which indicates that it is not a phenomenon restricted to a single item.


Part of the growth, according to the study, can be attributed, among other factors, to the increase in the minimum wage, which ends up affecting other related expenses, such as the benefits associated with the Organic Social Assistance Law, social security and unemployment insurance. Not to mention the restructuring of careers in the Federal Executive and the expansion of the Bolsa Família Program.

The impact of the rise in public spending was mitigated by the equally significant rise in tax revenue and economic growth. In real terms, this year, the collection of taxes until July reached R $ 335,6 billion, 10% higher than the same period in 2006. With this scenario, according to Ipea, the public sector will easily reach the goal of 3,80% of the Gross Domestic Product (GDP) foreseen for 2007 in the Budget Guidelines Law (LDO).

Yellow light

However, the researchers explain that, even maintaining a significant primary surplus, fiscal policy may inject an additional dose of demand into the economy. "As a result and to prevent the expected rise in inflation in 2007 and 2008 from giving rise to expectations of accelerating prices for the second half of the current government, it is important that the real rate of change in public spending decreases next year," they ponder. the specialists.

And the yellow light for inflation may have already come on. The analysis carried out by Ipea's GAC found that there is a “modest inflationary acceleration in progress” in the country, which may continue in 2007. According to GAC expectations, the inflation rate is expected to increase by about 3 pp in 2008.

According to the economist at the Getúlio Vargas Foundation, Salomão Quadros, the increase in expenses may generate pressure on inflation, but not alone. "There has to be a composition and a favorable scenario for this to happen," he explained. The problem is that spending has grown above inflation, preventing tax cuts, preventing private investments. It is necessary to reduce spending to reduce the pressure of demand and so that interest rates do not have to rise further, he explained.

The public accounts specialist, Raul Velloso, on the other hand, the link between public spending and inflation is not direct and everything is under control. “Spending is growing exponentially every year, but inflation is under control. It (spending) is bad for inflation, but the government has efficient mechanisms to handle an inflationary wave. The biggest impact of the increase in spending is the reduction of private investments ”, he explained.

At the rate at which they are moving, public administration spending can have serious impacts on the country's inflation rate. The alert was made in a bulletin from the Institute of Applied Economic Research (Ipea).