Rising public spending seen to damage Brazil's economy

Reinforcing social programs has helped Brazil’s President Jair Bolsonaro to gain ground in the polls ahead of October’s presidential election, but the strategy could create fiscal problems. 

A survey released by pollster and investment house Genial & Quaest showed former leftist president Luiz Inácio Lula da Silva remains the frontrunner, with 45%, compared to Bolsonaro’s 31%. 

However, Lula had an advantage of 16 percentage points in June and 17 percentage points in May. 

According to political analysts, Bolsonaro’s rising numbers can be attributed, among others, to his attacks on federal oil firm Petrobras' fuel price policy and a reduction of fuel sale taxes. 

Meanwhile, the lower house will vote a government-proposed increase in monthly payments under the Auxílio Brasil social welfare program from 400 reais (US$77) to 600 reais.

The vote was postponed slightly due to lack of quorum. If approved, the measure will cost around 41.2bn reais per year.

Moves that increase public expenses could also push inflation and lead the central bank to keep the Selic rate high for a prolonged period. 

"We are seeing signs of a government and congress that are more friendly to increased spending, and economic theory teaches that more public spending means higher interest rates and higher taxes," Roberto Troster, an economist at consultancy Troster & Associados, told BNamericas.

Currently, the rate is 13.25%, the highest level since end-2016, when it was 13.75%. 

The high base rate is already having an impact. The central bank's IBC-Br index, considered a proxy for broader GDP, contracted 0.44% in April compared with March.