Brazil: Wasting a good crisis is one thing; wasting a boom is another. The second is the risk faced by Brazil. While interest rates are rightly high to ward off inflation, they have resulted in an overvalued currency. The BRIC nation should be running a big budget surplus and building reserves.
The combination of an inexorable rise in the real and the nagging refusal of inflation to decline toward the government's target of 4.5 per cent has befuddled Brazilian policymakers all year. Since foreign investors can earn an impressive rate of interest - the short-term Selic rate is 12.25 per cent after Wednesday's hike - in a currency up 16 per cent against the dollar in the past year, big inflows of cash are inevitable.
In theory, even Keynesians and rival supply-side economists agree that the solution to overheating is for the government to run a budget surplus. Brasilia should be doing that, and ideally would use some of it to create a stabilization fund which can be tapped to support the economy when prices decline. Norway and Chile boast such funds.
Brazilian fiscal policy was profligate by any standards in the election year of 2010. While there has been some attempt at discipline in 2011, a surplus is still some way off. The primary budget surplus, before debt service, is on track to recover to around 3 per cent of GDP. But the all-in deficit is still heading for 2 per cent of GDP.
Early indications for the 2012 budget show some accounting tweaks being used to stop the primary budget surplus narrowing. The draft budget for next year also projects a 13 per cent rise in the minimum wage. In Brazil that has a big impact on government spending, since all public sector remuneration is generally set as a multiple of the minimum wage.
Meanwhile, President Dilma Rousseff has lost the services of Antonio Palocci, a former finance minister who resigned as her chief of staff this week. Palocci had some ability to restrain politicians' spending ambitions. Even with him in place, Rousseff wasn't making the needed discipline happen. Without him, the chances are lower still.
