Marcela Ayres, Bernardo Caram

BRASILIA (Reuters – Brazil has seen a dramatic improvement in its finances thanks to strong commodities prices and a recovering labor market. This, according analysts, is a relief from concerns regarding Brazil’s future fiscal health. It also helps attract more foreign investment.

However, the staggering public-sector surplus also provides fodder for both left and right presidential candidates who are looking to change fiscal rules in October.

Jair Bolsonaro of the Right and Luiz Lula da Silva (leftist ex-President) have both attacked a constitutional limit on spending that is crucial for stabilizing public finances following a devastating 2015-2016 recession.

Brazil may soon open a new chapter of its economic telenovela if it does not have a spending ceiling that limits growth in federal expenditures.

Luciano Sobral is chief economist of Neo Investimentos. “With the spending limit, it’s easier to predict what public debt will behave.” It is not certain that it will be able to survive without Bolsonaro or Lula next year. “We don’t know which one will succeed it.”

Federal government revenue soared 26% in the first quarter – nearly 15% above inflation – which helped to lift the public sector’s primary surplus to 1.4% of GDP in the 12 months through February, according to central bank data last week.

Bolsonaro was not content to celebrate the strength of his finances. He lashed out against rules that kept “excessive revenue” from being within his grasp.

“You can’t spend a penny of that on infrastructure because of the spending cap,” Bolsonaro said in a radio interview https://www.reuters.com/article/uk-brazil-economy-bolsonaro-idUKKCN2ML1XR last month. Many people agree that this needs to be fixed. We’ll discuss the issue again after the elections.

His rival Lula, who is leading in the polls, has also made no secret of his plan to scrap the spending cap https://www.reuters.com/world/americas/lula-says-reducing-poverty-is-brazils-priority-not-fiscal-containment-2022-01-19, saying his priority is poverty reduction rather than fiscal targets.

Investors are optimistic about shifting policy winds and flock to Latin America’s biggest economy for a relative safe bet, despite the conflict in Ukraine as well as the new wave of COVID-19 rattles China.

Brazil saw net portfolio inflows of $5 billion during the first three months. This helped to stabilize Brazil’s currency against the U.S. Dollar in the past year, even with a recent selloff.

Brazil’s five-year experiment with a spending ceiling shows it has been key to an improving its fiscal position, said Rafaela Vitória, chief economist at Banco Inter.

She noted the country’s last bout of double-digit inflation, in late 2015, also pushed up government revenue – but spiraling expenditures erased those gains.

Officials from Brazil claim that Brazil also did its research with labor reform and new rules to encourage infrastructure investment. This will boost economic growth and help beat negative fiscal projections.

Adolfo Sachsida was a special advisor to the minister of the economy. His count shows that the private sector had underestimated government revenues for 20 consecutive months.

He stated that the market underestimates the effectiveness of microeconomic reforms he has made. While we have some concerns, I encourage everyone to take a look at the figures. These data show that the facts are obvious. He added that fiscal improvement was not an opinion.

However, the data have not changed Bolsonaro and Lula’s minds about Brazil’s fiscal structure for next year.