Account overrun could make government change fiscal target at the beginning of 2024
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Amid uncertainties about the increase in revenue and the prospect of growth in government expenses, there is a consensus among financial market analysts and congressmen that the zero deficit target, foreseen by the fiscal framework for 2024, will not be achieved.
The expectation is that in the first bimonthly review of income and expenses next year it will become clear that it is impossible to comply with the rule. Thus, in addition to needing to limit expenses in an election year, the government may be forced to change the fiscal target.
The market has long doubted the achievement of the target. At the beginning of the year, even before the presentation and approval of the framework, a deficit equivalent to 1% of the Gross Domestic Product (GDP) was expected in 2024, according to the median of projections collected by the Central Bank.
Expectations have improved slightly since then, but remain poor: the deficit projection has fluctuated between 0.7% and 0.8% of GDP. But some consultancies, such as Galápagos Capital, are still betting on an even bigger loss, of 1% of GDP – the same expected for this year.
The hypothesis of revising the target has already been raised by Planalto’s allies. In practice, it would be like changing the rules in the middle of the game, in the first year of office, admitting to the market that the government will not be able to honor its accounts.
“Even though this is a bad sign, changing the target is a real possibility”, says Murilo Viana, specialist in public accounts and senior consultant at GO Associados.
Government time is short and political costs are high, says expert
Viana assesses that the government’s schedule is “super tight” to approve bills in the National Congress that allow for an increase in revenue. “There are several battlefronts that the Minister of Finance will have to face until the end of the year”, he says.
Some topics moved forward thanks to the negotiations between Minister Fernando Haddad and the President of the Chamber, Arthur Lira (PP-AL). The government also promoted a mini-reform and gave power in ministries to Centrão to help with projects to be voted on. “But there is still a broad and complex tax reform that will certainly be modified in the Senate and will need to return to the Chamber”, recalls Viana.
At the same time, new problems arise every day and Congress’s agenda is overrun by non-economic agendas, which, according to Viana, divert the focus from measures relevant to fiscal balance.
A good example is the obstruction of votes that has been promoted by parliamentary groups, in reaction to interference by the Federal Supreme Court (STF) in the Legislature. “Time is short and the government’s political capital is decreasing”, believes the consultant.
Increasing revenue is a challenge fraught with uncertainty
The challenging scenario for public accounts was outlined by the government itself when it decided to increase public spending by 2% of GDP, with the PEC fura-ceto (officially called PEC da Transição), and focus solely on increasing revenue to balance expenses. .
With the fiscal framework, announced in March, the government committed to zeroing the deficit in 2024 – that is, ensuring that the government is able to spend (not counting interest on the debt) the equivalent of what it collects.
Of the R$168 billion needed to eliminate the deficit in 2024, the government calculates that something close to R$50 billion will come through tax disputes by the Fiscal Resources Administration Council (Carf).
The government managed to approve the return of the casting vote, which breaks the tie in the disputes in favor of the Tax Authority. The expectation is that another R$48 billion from processes from previous years will be added. The other R$70 billion needed must come, in Minister Haddad’s accounts, from measures that depend on congressmen.
For the GO consultant, in addition to the uncertainty regarding the approval of the Executive’s projects, revenue forecasts are overestimated. “No one knows exactly how much will be collected. The government is increasing the collection base with new measures and sectors and there are no guarantees as to what taxpayer behavior will be like”, highlights Viana.
Parliamentarians do not believe in increasing revenue
Federal deputy Luiz Philippe de Orleans e Bragança (PL-SP) assesses that it is unlikely that the government will be able to collect what it expects. A survey released by the Ranking of Politicians showed that 72% of deputies and two thirds of senators do not believe that the Lula government will be able to achieve the goal of zero deficit.
In the deputy’s assessment, the government will be able to increase the revenue base in some non-taxed sectors, such as gaming and electronic betting. But it will not be able to maintain the rates proposed in projects aimed at richer taxpayers, such as the taxation of investments abroad (offshore) and closed-end funds.
A sample of the difficulty was proven with the proposed reduction in taxation on gains accumulated by holders of funds in tax havens (offshores) and closed-end investment funds in Brazil, announced on Wednesday (4) by the proposal’s rapporteur, Pedro Paulo (PSD-RJ). The rate fell from the 10% planned by the Treasury to 6%. The cut was negotiated with Minister Haddad to overcome resistance and pave the way for the measures to advance.
With offshores, the forecast is to raise R$7 billion per year and with closed funds, R$10 billion. In the Treasury queue there is still a project to tax Interest on Equity (JCP). Luiz Philippe describes the government’s revenue projections as “highly fictitious”.
The deputy also cites an ambition of the left that, at least officially, was not embraced by Minister Haddad: the creation of a Tax on Great Fortunes (IGF). In 2021, PT deputies filed a complementary bill to introduce the tax, PLP 130/2021.
Social organizations and unions that make up the Tax the Super-Rich campaign estimate that the IGF could raise R$40 billion per year from progressive rates ranging from 0.5%, for assets worth R$10 million, to 1.5% , for those exceeding R$80 million.
Taking into account the interests of congressmen themselves, the prediction is that this taxation will not pass in the Chamber. “If it passes, revenue will be low and only initially. There will be no second moment, because capital will flee the country, as has already happened in countries like France, which approved the measure and then reversed”, says the deputy.
Most projects, for him, have a revanchist and nationalist character. “The government’s logic is to tax any capital that is circulating in economic activity. The objective is always to collect and control. Free money is a crime. You see money, go there and tax it in the name of promoting social justice, this is the mantra” , he states.
In the opinion of deputy Gilson Marques (Novo-SC), who also does not believe in a significant increase in revenue, the biggest problem is that the expenses contracted by the government are already greater and will make fiscal adjustment unfeasible. “This is a government that just wants to spend and collect. It’s not going to eliminate the deficit, it’s going to blame someone. And it’s going to continue spending.”
Underestimated expenses and bomb bills worsen bills
On the expenditure side, the government promoted measures that will have a major impact on public accounts, including the increase in income transfer programs. The main one, however, was the granting of a real adjustment (above inflation) for the minimum wage, which guides social security contributions and the Continuous Payment Benefit, BPC.
In the budget presented at the end of August, the government projected Social Security expenses at R$913.9 billion. But the Independent Fiscal Institution (IFI), linked to the Senate, calculates that the expenditure, in fact, should be R$932.4 billion, a difference of R$18.5 billion.
At the same time, Congress has approved more agendas which, in practice, mean more spending. Parliamentarians want to extend the payroll tax exemption for 17 sectors, at a cost of R$9.4 billion, and extend it to city halls, which should cost between R$7 billion and R$9 billion for the public coffers. There is still a line of projects considered “bomb agendas”.
The account will not close, assesses Luiz Philippe. “The result will be to print money. As a result, interest rates will remain high and investment and employment low”, he says.
Administrative reform may be on the agenda
Pressured by the reality of public accounts, Luiz Philippe believes that, sooner or later, the government will have to look at cutting spending: “The government knows this, it just can’t admit it publicly.”
In order not to go back on the narrative defending public service, the deputy believes that President Luiz Inácio Lula da Silva (PT) can signal Arthur Lira to move forward with the administrative reform proposal.
Lira has already raised the possibility of taking the Proposed Amendment to the Constitution (PEC) 32/2020, presented by former Economy Minister Paulo Guedes, which deals with the reform, out of the House drawer. Reported by deputy Arthur Maia (União -BA), the proposal has already been approved by a special committee.
At the time, Lira’s initiative was seen as a message to the government, within the strategy of expanding the space of power. “Now, they can use as an argument that the opposition and Centrão, “the reactionaries”, managed to approve the reform. And emerge politically preserved”, predicts Luiz Philippe.
All of this should weigh on next year’s electoral balance. Even with the strategy favorable to the government, the result would be beneficial to the country. “At this moment of union of the parliamentary fronts of the House, there are great chances of the reform going ahead”, believes the deputy.
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