Flying too high for safety

NEW skyscrapers are going up along Avenida Faria Lima in the business district of São Paulo. Sales of computers and cars are booming, while a glut of passengers has clogged the main airports. Brazil created 962,000 new formal-sector jobs between January and April—the highest figure for these months since records began in 1992. Everything indicates that over the past six months the economy has grown at an annualised pace of over 10%. Even allowing for an expected slackening, many analysts forecast that growth in 2010 will be 7%—the highest rate since 1986.

The problem is that while it may be growing at Chinese speeds, Brazil is not China. Because it still saves and invests too little, most economists think it is restricted to a speed limit of 5% at the most, if it is not to crash. The growth spurt is partly the result of the stimulus measures taken by President Luiz Inácio Lula da Silva’s government when the world financial crisis briefly tipped the country into recession late in 2008. The trouble, say critics, is that much of the extra government spending is turning out to be permanent—and so the economy is starting to resemble a Toyota with the accelerator stuck to the floor.

The strain is showing. Businesses are chasing after scarce skilled labour. Inflation for the 12 months to April reached 5.3%, above the Central Bank’s target of 4.5%. Imports are set to top exports this year, for the first time since 2000, and the current-account deficit should widen to 3% of GDP.

The authorities are starting to worry. Last month the Central Bank raised its benchmark Selic interest rate by 0.75%, the first rise in nearly two years. Many economists in São Paulo believe that this one will be followed by others, taking the rate from its low of 8.75% to 13% by next year.

The government’s critics say that lax fiscal policy is making the Central Bank’s task harder, increasing the risk of the boom ending in a sharp slowdown next year. When he became president in 2003, Lula stuck to the sound fiscal policies he inherited from his predecessor, Fernando Henrique Cardoso. Thanks to faster growth and higher tax revenues, between 2003 and 2008 Lula’s government managed to keep public debt in check even while expanding spending. By treating the recession as “a licence to spend”, the government is now undermining the credibility it piled up, says Raul Velloso, a public-finance specialist in Brasilia.

Officials share those concerns—up to a point. The government has withdrawn nearly all of the tax breaks it enacted to boost demand during the recession. On May 13th ministers declared that they would shave 10 billion reais ($5.4 billion) from the running costs of the federal government this year. That followed a similar announcement of another 21 billion reais of cuts in March. But this hardly amounts to slamming on the brakes. The cuts are to the generous (and notional) budget approved by Congress. Even if implemented in full, they will merely slow the rate of increase in government spending, keeping it constant or slightly lower as a share of GDP, concedes Nelson Barbosa, a senior finance official.

The government is still injecting money into the economy in two controversial ways. First, the National Development Bank (BNDES), whose loans cost about half the Selic rate, has expanded its lending by almost half. It has been able to do this because the treasury granted it two long-term credits totalling 180 billion reais. Those credits, for which the BNDES has offered IOUs, have led to accusations of creative accounting. While adding to the government’s gross debt, they have not driven up the more closely watched figure for public debt, net of assets: at 42.7% of GDP, this is back to its level of mid-2008, and is much lower than the debt burdens of European countries.

Second, the government has jacked up its payroll spending. The number of federal civil servants has increased fairly modestly since 2003 (by around 10%). But they have been treated generously: the total federal wage bill more than doubled in nominal terms between 2003 and 2009, while inflation was less than 50%. Lula has pushed up the minimum wage much faster than inflation too. That has helped to make the income distribution less skewed, and boosted consumer demand. But it has a knock-on effect on pension benefits.

Mr Barbosa insists that faster growth will allow the government to squeeze payroll and pension spending gently over the coming years. The BNDES helped sustain investment when the financial markets seized up. The latest bout of financial turmoil has seen the real depreciate by 5% or so this month. But Brazil’s stockpile of international reserves means it is well-placed to withstand market panics. Mr Barbosa says that the critics should look at the long-term trend, under which real interest rates (ie, after inflation) have fallen from up to 20% in 2003 to between 5% and 10%. Once the new monetary squeeze is over they will fall further, he says.

Certainly many Europeans would love to have Brazil’s problems. Its economy has acquired underlying strength. Companies are scurrying to satisfy the demand for consumer goods of a rapidly expanding lower-middle class, while China continues to suck in Brazil’s exports of raw materials. Productivity is rising. Costs per unit of labour are increasing at only about half the rate of real wages, reckons José Roberto Mendonça de Barros, a consultant and former finance official.

But commodity prices are starting to weaken. Faster growth would be more assured if the government made room for lower interest rates and installed better infrastructure. The next president, elected in October, will have to tackle this. The economy’s red-hot start to the election year has increased the chance that it will be Lula’s candidate, Dilma Rousseff, who gets the chance to try.