MNI INTERVIEW: Brazil Budget Positive Despite Noise- IFI Head

The Brazilian government’s spending freeze in its 2025 budget announced last week was a positive sign on the fiscal front, despite market “noise” created by an increase in the Tax on Financial Transactions (IOF), the director at the Independent Fiscal Institution (IFI), an independent public body, told MNI.

“Overall, I think the outcome was good, except for the IOF issue, which ended up contaminating things a bit and adding noise,” Alexandre Andrade said in an interview, in which he said that expansionary fiscal measures were working against contractionary monetary policy.

The government announced a BRL 31.3 billion spending freeze, with BRL10.6 billion of that responding to higher expenses and BRL20.7 billion to lower-than-anticipated revenues. The government also introduced a unified IOF rate of 3.5%, which was effectively an increase. Previously, each item had a different rate.

NEGATIVE REACTION

After a negative market reaction, Finance Minister Fernando Haddad backed down from the decision to increase the IOF on international remittances of investment fund resources — a move that had been seen as a potential exchange rate control measure. The remaining rates were maintained.

“Even though the measure was rolled back for investment funds, it can still be seen, in practice, as an attempt at capital controls. In short, I don’t think it was a very good move,” Andrade said.

He added that it gave the impression of a lack of coordination within the government regarding the management of fiscal, monetary, and exchange rate policies.

“It is the central bank’s role to manage monetary and exchange rate policies, and from what we could see, there seemed to be some miscommunication between the Ministry of Finance and the central bank around this IOF tax increase.”

The director said the market response to the IOF increase signaled a limit to the strategy of adjusting through revenue increases without cutting expenses.

MONETARY POLICY

Expansionary fiscal policy is interfering with the conduct of monetary policy, Andrade said. (See MNI INTERVIEW: Lack Of BCB Guidance Doesn't Mean End Of Cycle)

“Our models show that the output gap is positive, meaning the economy is growing above potential. In such cases, there is no justification for maintaining an expansionary fiscal policy.”

The Central Bank of Brazil decided to increase its official Selic rate by 50 basis points this month to 14.75%, offering no forward guidance for upcoming meetings, and stated that borrowing costs should remain restrictive for a “prolonged period.”

“Monetary policy is contractionary, but fiscal policy is not. Without a doubt, this shows that fiscal policy is indeed hindering the conduct of monetary policy,” Andrade added.

His projection shows the Selic rate reaching 15.25% in June, with one more 50 basis point hike, followed by a pause.