Changing the fiscal target would not be a good decision – 09/06/2023 – Solange Srour

In recent weeks, rumors about changes in the 2024 primary target, provided for by the fiscal framework that replaced the spending ceiling, gained strength and began to negatively influence domestic asset prices.

The goal of zeroing the public deficit in one year has always been seen as ambitious, since it was clear from its announcement that it would be pursued exclusively via increased tax collection —the challenge of which is on the order of R$160 billion. If analysts (at least those participating in the Focus survey) never projected a primary result within the bands allowed by the framework, then why was the target change perceived as a risk factor for the market?

The year 2024 marks the beginning of the new fiscal framework, which was precisely designed to be a lasting constraint and provide a credible commitment to budgetary discipline. Even if what makes our debt sustainable in the medium term is the control of public spending growth, not the increase in revenue, giving up the primary result target without first trying to seek to increase revenue at all costs or without demonstrating a willingness to controlling expenses via some contingency weakens the credibility of the fiscal rule.

Even so, some analysts understand that, with the return of expenditure indexation mechanisms (Health and Education) and with the approval of the new rule for the readjustment of the minimum wage, the increase in mandatory expenditure will be significant at least until 2025, making the unattainable primary target in the coming years. That is, if the rule’s credibility is no longer total, why not adjust it to reality?

It turns out that abandoning the primary target now, avoiding “the pain” of negotiating with Congress to approve a tax increase and moving away from the political conflicts of a contingency, will increase uncertainty in relation to any new announcement of economic policy . It could even quickly erode the victory that was the maintenance of the inflation target by the CMN, in July of this year. Without fiscal credibility, inflation expectations not only will not be anchored around the 3% target, but they could start to rise again and disrupt the process of lowering interest rates that started last month.

The current moment would not be at all favorable to a possible change in the primary target due to the presidential veto published last week on the new fiscal framework. He overturned the prohibition that the Budget Guidelines Law provided for the exclusion of primary expenditures from the primary result target. Although the government’s motivation was to accommodate operations with precatorios, the veto weakens the framework, because, in a scenario of difficulty in finding revenues to meet the fiscal target, the way to remove expenses (for example, PAC investments) from goal becomes unobstructed.

Our challenge to stabilize the debt was already enormous before the Transition PEC, which increased mandatory spending by 2% of GDP without any counterpart, in a country that already showed enormous difficulty in raising the tax burden in recent decades. Now we will have to deal with a bigger debt, but we need to minimize its growth rate at all costs.

How well put it berry Eichengreen in his work presented in Jackson Hole, the public debts of several countries have skyrocketed to unprecedented levels in times of peace and will not decrease significantly in the near future. We will have to live with this new reality, as large and persistent primary surpluses are not on the political cards and require a degree of political solidarity that currently does not exist in almost any other place in the world.

High debt is generally a much bigger problem for emerging countries than for advanced economies. In a scenario in which global interest rates stay higher for a prolonged period of time, the fiscal imbalances of some of the emerging countries may bring greater vulnerability than what happened in the last great movement of raising debts —during the great financial crisis of 2008.

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