The "mathematical magic" in the bottomless pit of the R$ 1 trillion public sector interest bill.

The release of the consolidated results balance for the public sector in 2024 by the Central Bank , on Friday, January 31st, brings indicators that reinforce two certainties: the imbalance of public accounts last year, despite having shown a surplus in December and meeting the annual target stipulated by the fiscal framework , and the accelerated growth of public debt.

Behind these two components lies the staggering amount spent by the public sector on interest payments last year – nearly R$1 trillion, money that could have been used for investments in various sectors, but instead served to further disrupt the economy.

NeoFeed consulted two economists to analyze the economic team's options for reducing this bottomless hole in the interest bill in 2025. The conclusion is that options exist, but will require unpopular government measures that go against the fiscal policy that has been adopted.

The consolidated public sector data released by the Central Bank includes the central government (comprising Social Security and the Treasury, in addition to the Central Bank itself), states, municipalities, and state-owned enterprises. Companies belonging to the Petrobras and Eletrobras groups, as well as public banks such as Banco do Brasil (BB) and Caixa Econômica Federal, are excluded from the calculation.

The consolidated public sector recorded a primary deficit of R$ 47.553 billion in 2024, equivalent to 0.4% of GDP. In comparison, Brazil's primary deficit in 2024 was much lower than that of Mexico (6% of GDP deficit), an emerging market country, and the United States (6.4% of GDP).

For the year as a whole, the federal government's deficit of R$ 45.4 billion confirmed compliance with the target set by the fiscal framework . Furthermore, considering only the month of December, the central government, states, municipalities, and state-owned enterprises recorded a combined surplus of R$ 15.745 billion.

The apparent "good news"—which, in fact, isn't good news—stops there.

By nominal terms, which includes interest expenses, the consolidated public sector recorded a much larger deficit in 2024, of R$ 997.976 billion, equivalent to 8.45% of GDP, according to the Central Bank. In 2023, the result was also a deficit, of R$ 967.417 billion.

In other words, the nominal deficit for 2024 – resulting from a primary deficit of R$ 47.553 billion and interest payments of R$ 950.423 billion – exposed the true size of the hole in the Brazilian economy.

Why has this spending on interest grown so much? For Roberto Padovani , chief economist at Banco BV, the question reveals a fundamental characteristic of the dynamics of public debt, which is the fact that it depends on its own trajectory.

According to him, since the federal government, upon taking office in 2023, implemented a shock of spending based on a public debt that was already high and with high interest rates, it has not been able to obtain revenues of the same magnitude since then and has had to take on more debt. The situation worsened in 2024, with further fiscal imbalance.

“When debt rises in a bad global context, like the one Brazil is experiencing now, it generates uncertainty: financial flows leave the country and the dollar comes under pressure, which increases inflation and leads the Central Bank to raise interest rates, entering a negative spiral,” says Padovani.

This cycle continues with an increase in the cost of rolling over debt, worsening interest rates and the debt itself. "All this is aggravated now by the fact that interest rates are so high that they are likely to inhibit economic growth, reducing the capacity to collect taxes," Padovani continues.

The negative spiral completes the cycle with the loss of market confidence in the debt trajectory, further increasing the cost of that debt.

A framework lacking credibility.

The diagnosis by Gabriel Barros , chief economist at ARX Investimentos and former director of the Independent Fiscal Institution (IFI), is critical of both the primary deficit results presented by the Central Bank and the government's fiscal policy.

According to him, the government having met the primary deficit target (0.5% of GDP) doesn't count: the framework has lost credibility because the economic team has deducted a series of expenses from this stipulated target.

Furthermore, the government received a series of extraordinary revenues from federal state-owned companies – BNDES brought forward the payment of dividends, as did Petrobras, to help balance the 2024 budget. Additionally, the government obtained temporary revenues through agreements with Vale and Copel, meaning inflows that are not considered recurring revenues.

“At the end of the day, the benchmark of fiscal policy is always public debt,” says Barros. “What the market is concerned about is the trajectory of public debt, which the current framework doesn't address – no structural measures have been approved to tackle this problem.”

According to the economist, the government has always done the bare minimum to keep the framework afloat, making adjustments to the accounting that he describes as "mathematical magic." This ends up raising interest payments, as it becomes increasingly expensive for the Treasury to roll over this debt in both the short and long term.

"The fact is that the trajectory of public debt is growing and will continue to do so – at the end of the term, the government will hand over a debt 12 to 15 percentage points of GDP higher than it received," he warns. Brazil's gross debt closed 2024 at 76.1% of GDP, an increase of 2.2 percentage points in the accumulated year. Since the beginning of Lula's government, gross debt has grown by 4.4 percentage points of GDP.

Regarding measures to reduce this escalation of interest rates, the two economists have converging diagnoses.

Barros argues that the government needs to deliver reforms on the expenditure side that structurally reduce public spending, which would impact the perception of risk. He cites the administrative reform, which has been debated since 2017, but which the government has not yet demonstrated the political will to implement.

Another critical point is the government's mistake of indexing expenses to revenue, going against the spending cap, where revenue was adjusted for inflation.

“As a result, all the tax revenue increase that Haddad managed to secure will leak into mandatory spending on health and education,” he says. The problem is that this will require the government to obtain extraordinary revenue growth every year to keep the framework afloat.

Finally, Barros proposes a merger of all social policies, which are currently decentralized, since the government spends three times more on transfers as a percentage of GDP than it did before the pandemic.

"Since scrutinizing social policies affects popularity, the government's dynamic is not about fixing fiscal policy, but about getting re-elected," he laments.

Padovani, from Banco BV, suggests adopting three more generic measures to reduce the growth of public debt and interest expenses.

One of them is a more uniform discourse from the government regarding cutting expenses, without the delay shown in December, before the announcement of the promised measures.

The economist also advocates for a more robust fiscal rule than the one advocated by the framework, according to which spending should grow by 70% of revenue, but a significant portion of spending (health and education) is indexed to GDP, which represents 100% of revenue.

Finally, the government needs a quick credibility boost in order to achieve a higher primary surplus.

“With these measures and support from Congress, it is possible to reassure investors, and even if the debt continues to rise, the pressure on financial flows will decrease, the dollar should fall, the Central Bank can cut interest rates, and the debt trajectory tends to improve, reducing interest expenses,” says Padovani.