Brazil’s public debt plummeted in 2 years, but projection is high

In October 2020, due to the emergency measures adopted by the government to face the Covid-19 pandemic, Brazil’s public debt reached 87.6% of the Gross Domestic Product (GDP), the highest level in the Central Bank’s historical series ( BC). A year later, with the recovery of the economy, the indicator had already retreated to 80.4%, and the market consensus saw a downward trend, until the level of 78.3% at the end of 2030.

The debt, however, fell much faster. Good fiscal results in the last two years made the debt/GDP ratio end 2022 at 73.5%, the lowest since July 2017. Now, however, the financial market once again projects a growing trajectory for the country’s debt, with an equivalent debt to 90.4% of GDP at the end of the decade, according to the median of projections collected by the BC’s Focus report. For the end of 2023, the midpoint indicates a doubt of 78.6% of GDP, more than 5 percentage points above last year’s level.

The indicator is one of the benchmarks used by international risk rating agencies to assess a country’s solvency. The drastic change in expectations in a few months is the result of a series of events beyond the change in the Presidency, but it shows the challenge that Luís Inácio Lula da Silva’s (PT) economic team will face – starting with the new fiscal framework that promises submit by April.

How public debt fell in 2021 and 2022

The first factor that helps to understand the oscillation in the projections was the favorable global scenario that helped to boost public accounts in the last two years of the government of Jair Bolsonaro (PL). At the beginning of 2021, the market estimated an upward curve in public debt, forecast to reach 2030 with an indicator above 97%, which ended up being revised throughout the year.

Luiz Guilherme Schymura, director of the Brazilian Institute of Economics (Ibre) of the Getúlio Vargas Foundation (FGV), explains, in an analysis published in January, that the positive surprise “derived in a significant part from positive factors that do not exactly reflect the current fiscal policy – although it is undeniable that the Social Security reform approved in 2019 and the real containment of the national and nominal minimum wage of the civil servants’ payroll also contributed to the improvement of fiscal results”.

“We were in a moment of recovery of the world economy, which was followed by a very strong appreciation of commodity prices, with emphasis on the price of oil, which rose a lot at the end of 2021 and remained high throughout 2022 ”, says economist Tiago Sbardelotto, from XP Investimentos. “This caused the government’s collection of taxes to grow in a way that surprised everyone.”

To give you an idea, the primary net revenue estimated by the federal government in the 2022 Annual Budget Law Project (PLOA), presented in August 2021, was R$ 1.596 trillion. At the end of the year, the amount reached BRL 1.856 trillion – that is, BRL 260 billion more than projected.

The result was a primary surplus of just over BRL 54 billion in the Union, compared to an original target of a deficit of BRL 170 billion. In the consolidated public sector (which includes states and municipalities), the positive balance was BRL 126 billion, compared to an initial deficit estimate of almost BRL 50 billion.

Revenues associated with the mineral extraction sector, mainly with oil and gas, corresponded to 1.8% of GDP in 2021 and 2.6% in 2022, well above the average of 0.9% between 2011 and 2020, according to Ibre /FGV. “Until then, we had a fiscal rule, the spending ceiling, which restricted the increase in expenses and which worked very well in those moments when there was a high collection”, emphasizes Sbardelotto, from XP.

Apart from the increase in collection, foreign exchange swap operations and amounts returned by the National Bank for Economic and Social Development (BNDES) to the National Treasury also helped to reduce the public debt. In 2021 and 2022 alone, the development bank settled in advance R$ 135.3 billion in resources that had been raised from the Union.

As the main measure of public debt is calculated based on the ratio between gross general government debt and GDP, the growth of the economy itself helped to reduce the indicator.

“These factors were fundamental and more than enough to offset a negative component that we had in the period, which was the increase in interest rates”, says the economist at XP. “The interest rate represents a cost for the public debt and had to increase from 2021 to 2022, weighing on the debt account, but not enough to offset these positive factors.”

Why did the market go back to projecting a rising path for public debt

More than the increase in interest rates, constitutional amendments approved to allow the expansion of spending above the legal ceiling deteriorated expectations regarding the future trajectory of the debt/GDP ratio. If in October 2021 the median of projections indicated a downward trend of 6.6 percentage points in the indicator between 2023 and 2030, today it is seen a growth of 11.8 points in the period.

“It is no coincidence that these jumps in the expectation of the trajectory of the debt/GDP ratio until 2030 happened after the approval of PECs [propostas de emenda à Constituição] which, by circumventing it so much, ended up completely demoralizing the role of fiscal anchor played by the federal spending ceiling created by EC 95/2016”, wrote Schymura, from Ibre/FGV.

The economist refers to the enactment of the PECs of the Precatories, in December 2021, of the Benefits (also called “Kamikaze”), in July 2022, and of the Transition (or “fura-teto”), in December 2022, which, together, allowed the Bolsonaro and Lula governments to spend a total of BRL 248.45 billion outside the constitutional expenditure ceiling.

In the face of a slowdown in economic activity due to interest rates – the market projects growth of 0.76% in 2023, according to the latest edition of the Focus bulletin –, the increase in expenses naturally leads to an increase in the debt ratio. /GDP.

What can be done

In January, the Minister of Finance, Fernando Haddad, announced a fiscal adjustment package that would have the potential to reverse the deficit of BRL 231.5 billion forecast for this year in the Budget to a surplus of BRL 11.1 billion, in an optimistic scenario. The minister himself, however, already admits that the target is daring and sees it as feasible to zero the deficit in two years.

The Independent Fiscal Institution (IFI) calculates that the country would have to run a primary surplus of 2.5% of GDP in 2023 to stabilize the debt. For the coming years, the institution considers that an average result of 1.5% would be necessary to maintain the debt in proportion to GDP, considering an average real growth of 1.9% and real implicit interest of 3.9% per year.

“The way in which the issue of the sustainability of the country’s public accounts will be addressed in the short term will represent an important element in dispersing uncertainties and regaining the credibility of fiscal policy”, says a report by the IFI published in January.

For Sbardelotto, from XP, the government can signal that it will stabilize the debt through the proposal of the new fiscal framework, which should be presented in the coming months. “If the market verifies that the debt is sustainable, we have a process of improvement in expectations, both for economic growth and for inflation”, he says.

“With this improvement in expectations, there is even room for the Central Bank to promote a faster interest rate reduction and, with that, reduce the cost on the debt. It is a virtuous circle that is created, but it depends, of course, on how this proposal will be”, he says.

He believes that in the medium term, there is room for adjustment in the accounts. The resumption of federal taxation on fuel, a reform of the tax system – which includes the taxation of profits and dividends and a ceiling for deductions from the Individual Income Tax – and the revision of tax benefits are some of the options on the revenue side .

On the expenses side, the revision of the Bolsa Família program register is also pointed out by several analysts as a way to cut expenses since an exaggerated growth in the number of single-person families, that is, composed of only one member, was verified. The Minister of Development and Social Assistance, Family and Fight against Hunger, Wellington Dias, indicated that the measure should be taken as of this month.