Market analysts are skeptical about the primary result targets defined by the government of Luiz Inácio Lula da Silva (PT) in its proposal for a new fiscal framework. While the Ministry of Finance proposes to zero the deficit next year and obtain surpluses as of 2025, the projections of financial operators have pointed to a more pessimistic scenario.
Compliance with the fiscal targets established by the economic team is considered fundamental by the government to be able to increase public spending year after year and, thus, implement the public policies promised in the campaign.
Approved at the end of May by the Chamber of Deputies and subject to approval by the Senate, the government’s proposal for a new fiscal rule sets the target for a neutral primary result in 2024 and then a surplus equivalent to 0.5% of the Gross Domestic Product (GDP ) in 2025 and 1% in 2026.
The text provides for a tolerance band equivalent to 0.25 percentage points of GDP for the target for each year – that is, the government would still be meeting the objective if it presents a deficit of up to -0.25% of GDP in 2024.
The median expectations of financial operators, however, point to a gap equivalent to 0.7% of GDP next year, according to the latest edition of the Focus bulletin, from the Central Bank. For the following years, projections are for new deficits of 0.34% and 0.2% of GDP, respectively. In other words, expectations are of debts in the red throughout Lula’s term.
Among the reasons for the prognosis are uncertainties in relation to the measures that the government needs to adopt to increase revenue and the possibility of an actual increase in expenditures above what is established in the fiscal rule itself.
Fiscal target depends on strong increase in tax collection
Since the presentation of the new fiscal framework, the most critical aspect of the proposal has been the need for robust revenue growth to sustain the model. Several economists consider an increase in the tax burden for the coming years to be inevitable.
Since then, the Minister of Finance, Fernando Haddad, has already presented a series of measures to collect more, but the estimated impact would still be below what is necessary to zero out the deficit in public accounts.
For 2023, the government itself predicts a negative primary result of BRL 136.2 billion – the projection was revised downwards on the 22nd, compared to the previous estimate of BRL 107.5 billion.
At the same time, a “trick” included in the final version of the new framework project authorizes the Executive to increase the space for new expenditures in the month of May 2024, if the projected revenue for the year, at the end of the second two months, is higher to that provided for in the Annual Budget Law (LOA).
The expansion of the spending limit, in this case, will occur in proportion to the difference between what was projected for 2024 in relation to what was carried out in 2023 and what was established in the LOA, up to a maximum of 2.5% of actual increase.
Bradesco, XP and IFI predict a gap in public accounts of 1% of GDP in 2024
“For next year, the approved text opens up the possibility of an actual increase in spending exceeding 70% of net revenue growth by the middle of this year”, comment economists at Bradesco, in an economic analysis report. “With the text approved, we maintain our primary projection of -1% for next year”.
Another group that predicts a negative primary result of -1% of GDP is the Independent Fiscal Institution (IFI), linked to the Senate. The agency forecasts negative indicators also in 2025 (-0.8%) and in 2026 (-0.4%).
“The complexity of the fiscal rule and the dependence on financing sources that have not yet been presented increase the risks of non-compliance with the proposed rules in the medium term”, says economist Vilma da Conceição Pinto, director of the IFI, in the institution’s fiscal monitoring report .
“This scenario of uncertainty in relation to primary revenues shows the size of the effort required to reach the primary result target”, he adds.
XP Investimentos also projects the central government’s primary deficit at a level equivalent to -1% of GDP in 2024.
“To close the account and reach a neutral primary result in 2024, in line with the target defined in the LDO, the government needs an additional BRL 110 billion to BRL 150 billion in net transfer revenues. The measures announced by the government so far are insufficient to arrive at such a figure,” comments the brokerage firm’s team of analysts.
Arcabouço is a fictional narrative, says Senate opposition leader
“It starts by showing that the framework is a fictional narrative. The government presents a goal that it deliberately will not meet”, commented the leader of the opposition in the Senate, Rogério Marinho (PL-RN), in an interview with the newspaper “The State of São Paulo”.
“I say it will not [cumprir a meta em 2024]. According to the project, he will need to send a letter to Parliament and we are talking about it”, said the senator.
The complementary bill establishing the new fiscal framework does not provide for the attribution of a crime of responsibility to the President of the Republic in case of non-compliance with the objective, only the need to write a letter to Congress with the justifications for not achieving the goal.