Brazil needs R$300 billion adjustment to stop growing debt

The government has a tough battle ahead of it to set the course of public accounts and stop Brazil’s growing debt. With little room for maneuver to conduct the fiscal adjustment, analysts’ projections indicate that the country’s debt should reach 90% of the Gross Domestic Product (GDP) in the next five years.

To reverse this situation, of debt considered high for an emerging economy, the size of the necessary adjustment, according to analysts, is around R$ 300 billion – both in cutting expenses and in increasing revenues. This is the billionaire amount that can take the Brazilian economy out of the hole predicted for this year and take it to a primary surplus capable of stabilizing the country’s indebtedness.

Reaching this value, however, is not an easy task and will imply unpopular actions. “The measures will involve society: one part will need to pay taxes, another part will lose some privilege”, says Gabriel Leal de Barros, chief economist at Ryo Asset. He reinforces that the current trajectory of the public debt leaves the Brazilian economy vulnerable. “Any global shock will be harder to absorb. It’s not a comfortable level.”

The difficulty in “putting the house in order” is because Brazil is facing a perverse combination. The country’s budget is already quite rigid, making it difficult to cut costs. On the other hand, there is little or no room for increasing revenues, in a scenario of high tax burden.

“Payments with Social Security and other benefits add up to almost 50% of public spending. Another 20% comes from salaries of federal civil servants”, says Flávio Serrano, economist at BlueLine Asset Management. “From the start, 70% of expenses are contracted to pay salaries and social security.”

Fiscal Package

This month, the Minister of Finance, Fernando Haddad, announced a fiscal package with the potential to transform the expected gap in the government’s accounts for this year, of R$ 231.5 billion, into a surplus of R$ 11.1 billion.

The measures are focused on increasing revenues and include the return of federal taxes on fuels – which is not yet defined – and a program to refinance tax debts. The package also provides, to a lesser extent, for cutting expenses, with a review of government contracts and programs.

However, Haddad himself has already acknowledged that some measures will be frustrated. Thus, instead of handing over the bills in the blue, he committed to reducing the 2023 deficit from 2.1% of GDP to 1% of GDP – which represents a gap close to R$ 100 billion.

In the announcement, the secretary of the National Treasury, Rogério Ceron, said that the measures announced put the country in a “much more sustained condition from the point of view of indebtedness”, since the debt would be stabilized at around 75% of GDP over a period of four years.

This assessment, however, diverges from the projections of many specialists. According to the Independent Fiscal Institution (IFI), the country would have to run a primary surplus of 2.5% of GDP in 2023 to stabilize the public debt. The institution assesses the package should be limited to reducing this year’s deficit to 1.3% of GDP. In this scenario, it projects the debt to 77.8% in 2023, approaching 80% of GDP in 2024.

“This plan was signaled as a package of preliminary measures. A little more needs to be done”, says Vilma Pinto, director of the IFI. “But, the package is important to show that the government is concerned with the trajectory of the debt”, she points out.