Illustration by Peter Schrank

Correction to this article

THE run-up to Carnival, which this year starts on the weekend of February 13th-14th, is a strange time in Brazil. At the airports that serve the most sinful cities, arriving passengers are handed free condoms as part of a government public-health programme. There is a run on mouthwash in Salvador, where kissing as many people as possible has become as traditional a Carnival pastime as watching the fierce competition between samba schools in Rio de Janeiro. Catholics and evangelicals tut-tut, and the middle-aged try to avoid it all. This year excess is on the minds of economists and financiers too. Having left behind a slowdown induced by the world financial crisis, many expect the economy to grow at 5-6% this year.

The Central Bank now sees signs of overheating. Inflation, at 0.75%, was surprisingly strong in January, pushing the rate for the past 12 months to 4.6%. The minutes of the latest meeting of the bank's monetary-policy committee suggest that it will raise its benchmark interest rate in March or April, for the first time since September 2008. Though the São Paulo stockmarket had a poor January, some big share offerings are expected (from Petrobras, the state-controlled oil firm; Banco do Brasil, a state-controlled bank; and OSX, a company with designs on shipbuilding and oil services). Familiar worries about creaking infrastructure are returning. Folha de São Paulo, a newspaper, recently reported that Brazil had to forego $1 billion in export earnings from soya because of congestion in a port in Maranhão state, in the north.

To slow things down a little and to head off a string of interest-rate rises, Guido Mantega, Brazil's finance minister, said this month that the budget will be pared back, with the aim of posting a surplus for the year of 3.3% before debt payments. He also announced the end of tax breaks on cars and white goods that made up part of last year's stimulus package.

Withdrawing the stimulus in an election year shows welcome political maturity. But only up to a point: at about 1% of GDP, Brazil's fiscal stimulus, launched in 2008, was comparatively small. Most of the extra spending went on hiring more public-sector workers and on social-security payments, rather than on building roads, ports or hospitals. Since public-sector workers are close to unsackable and trimming social security is even harder, the stimulus will leave the government's balance sheet with an enduring hangover.

Second, to create Mr Mantega's surplus, the government would have to strip out 49 billion reais, or a quarter of its total discretionary spending, according to economists at Itaú, a bank. This will be hard in an election year, when the federal government usually splurges. Curbing the hunger for pork of the government's coalition is always hard. It will be harder still as the political leverage of Luiz Inácio Lula da Silva, the president, ebbs ahead of the presidential election in October.

Almost continuously since 2003, federal-government spending has gone only one way, rising at an annual average rate of 8% in real terms (see chart). This year the budget allows for a 15% increase, which puts the finance ministry's talk of prudence in perspective. This binge has been possible because revenues have risen fast, too, because of economic growth and because more businesses have left the informal economy and gone legal. But so long as the extra money continues to go on hiring civil servants rather than doing things that will allow the economy to grow faster without overheating, interest rates will remain high. At its present level of 8.75%, the benchmark rate would be absurdly high in most big economies. For Brazil, it is apparently too loose.

There is a trade-off at work here that is familiar to many Brazilians. The government could spend less and create room for interest rates to come down. Or it can carry on spending and see them stay high, restricting Brazil's sustainable rate of growth to around 5%. This is not bad compared with even the recent past, but not as good as it could be. Carnival, though, is all about enjoying the present and forgetting about tomorrow.





Correction: We originally wrote that the Brazilian government would have to strip out 496 billion reais of spending to create Mr Mantega's surplus. That should have been 49 billion reais. This was corrected on February 18th 2010.