Doubts about the effectiveness of measures create a fiscal crossroads for Haddad in 2024 – 01/06/2024 – Market

The marathon of votes in the National Congress at the end of 2023 gave Minister Fernando Haddad (Finance) a sequence of victories on the economic agenda, but the progress of the measures is still insufficient to dispel the uncertainties about how much will actually be collected with the fiscal plan and the destination of the target for public accounts this year.

On the one hand, experts attribute some relevant achievements to the minister, such as the approval of taxation on exclusive investment funds (held by the so-called “super-rich”) and on offshore resources, in addition to tax reform — initiatives shelved in previous administrations due to lack of political support.

On the other hand, Haddad still has difficulty convincing the financial market that his plan will raise what he promises to eliminate the deficit in 2024.

Agents expect a gap of 0.8% of GDP (Gross Domestic Product), which represents an overshoot of the target in the first year of the new fiscal framework.

Members of the Luiz Inácio Lula da Silva (PT) government, in turn, fear that Haddad’s target will impose a very large sacrifice via investment contingency.

Economists talk about a blockade of up to R$53 billion, while the Finance Minister tries to limit the blockade to R$23 billion through a legal interpretation that is far from a consensus among technicians.

Furthermore, any failure to meet the target would trigger expenditure containment triggers in 2025 and 2026 (election year), something considered undesirable by members of the political wing of the government.

Faced with this fiscal crossroads, the pressure for a change in the target remains latent within the Executive and should return to the surface in the first months of this year. The market itself already takes the change for granted.

The most sensitive question now is what the new target will be, to what extent this will affect the objective set for 2025 (initially set at a surplus of 0.5% of GDP) and what is the risk of the government resorting to subterfuge to disguise the worsening of the fiscal trajectory.

Economist Italo Franca, from Santander Brasil, assesses that the ideal is to make the 2024 target more flexible to allow a deficit of 0.5% of GDP — thus, with the tolerance band, the government could be in the red by up to 0.75 % of GDP without triggering greater restrictions.

“More than that, it creates the perception that there is more space to spend or not present new measures. The point is to ensure that consolidation is maintained”, he says.

Senior economist at LCA Consultores Thaís Zara also assesses that the change in the target needs to be “very well communicated” and necessarily point to an improvement in public accounts, albeit gradual.

“If, faced with the threat that it will not meet the target, the target changes, this compromises the credibility of the framework”, he says.

Jeferson Bittencourt, former secretary of the National Treasury and chief economist at ASA Investments, states that his concern is not so much with the deviation of the numbers, but with the “stability of the rules of the game”.

“New interpretations of the rule are more worrying because they are more permanent than deviations from the projection of the result”, he states.

On December 22, during coffee with journalists, Haddad stated that the government will continue to pursue zero deficit. “We will pursue this goal, because it is important for the country,” he said.

When the pressure for a change in the fiscal target arose for the first time, back in August, the economic team’s speech was that a premature relaxation of the target could discourage Congress from approving measures to increase revenue. However, experts see little connection between this argument and reality.

“It has already happened in other periods, using the goal to indicate the intended effort. We try to use it as a way of pressuring Congress to approve the measures, but what we see is that Congress is much more attached to merit [das ações] and less on whether or not the target is met”, says economist Manoel Pires, coordinator of the Fiscal Policy Observatory at FGV Ibre (Brazilian Institute of Economics at Fundação Getulio Vargas).

Despite not seeing a mechanical relationship between the two things, Pires assesses that the economic team had a productive first year in the Legislature and generally follows “good practices” in fiscal adjustment.

“The measures are more along the lines of reviewing distortions than having a contractionary impact [via aumento de alíquotas]. The exception is the taxation of grants [do ICMS]which can have a contractionary impact on companies’ cash flow and reduce investment”, he says.

On the other hand, most of the measures are not expected to generate the expected volume of revenue, which compromises the fiscal trajectory indicated by Haddad’s team.

“There is great difficulty in reaching the 2024 target. We are in a period of falling revenue, even with GDP growing 3%. It is very difficult to row against this tide”, says Pires. “The impression I have is that [a meta] was out of calibration and imposes a very high contingency in historical terms.”

Haddad sent the 2024 Budget proposal with R$168.5 billion in extra revenue, distributed across ten measures. All were approved by the Legislature, but part was dehydrated during processing.

The most emblematic case is that of JCP (Interest on Own Capital). The original proposal was to end the possibility of deducting these resources, used to remunerate company shareholders, from the federal tax calculation base.

The approved version only makes adjustments to prevent abusive use of the instrument. To compensate for the frustration in revenue, projected at R$10.5 billion, the minister has already announced new measures.

Even greater insecurity surrounds non-tax measures. The government is counting on the willingness of companies to pay almost R$98 billion in agreements with the Federal Revenue, PGFN (Attorney General of the National Treasury) or to settle disputes with Carf (Administrative Council for Tax Appeals).

“According to Carf’s own technical note, [para alcançar a arrecadação] needs to judge 50% of the stock of all processes, increase the workload of counselors by 50% and have around 90% of those who lose in the quality vote [jargão para voto de desempate] adhering to the government’s negotiation. But Carf isn’t judging anything. The 90% adherence assumes that they will pay in 12 installments, that is, everything had to be judged now for the 12 installments to enter in 2024”, notes Bittencourt.

“By the rite itself, it is difficult to confirm what is the biggest individual collection of the package”, says the former secretary of the National Treasury.

Another problem is that a large part of the revenues projected for 2024 are one-off. These are extraordinary negotiations of debts and contracts or tax collections on a stock of assets that will not be repeated from 2025 onwards.

“Let’s say the market is completely wrong, the government delivers zero deficit. The non-recurrence of the revenue that closes the account could be in the region of R$ 130 billion. And as it needs to create a surplus of 0.5% in 2025, around R$60 billion, would be another R$200 billion [de ajuste em 2025]. There is little room for society to accept this continuous increase in the tax burden”, says the former secretary.

Excessive focus on revenue measures can also have counterproductive effects.

Pires, from FGV Ibre, recalls that relevant expenditures in the Budget are linked to revenue dynamics, which limits the productivity of fiscal adjustment, as gains on one side generate greater commitments on the other.

“The economic team needs to find political space to discuss this”, says the economist, citing the Health and Education floors and the resources stamped for the FCDF (Constitutional Fund of the Federal District), in addition to parliamentary amendments — which in 2024 reach the value record of R$53 billion.

In the coffee with journalists, Haddad said that Congress’ efforts to bind and stamp expenses, including for parliamentary amendments, create a “challenging” reality in the management of the Budget, but admitted that the topic is politically sensitive and conditioned the debate to a political decision of the Planalto Palace.

The spending review agenda also failed to take off. At the beginning of 2023, the Treasury promised savings of R$25 billion with a review of contracts and programs. So far, the most obvious result has been a saving of R$9.4 billion with the Bolsa Família registration review — the amount reallocated for other areas to spend.

Experts also point to the fragmentation of tax decisions as a relevant challenge.

The same government that seeks to rebalance the accounts announces a scholarship program for high school students (with a first contribution outside the spending limit), accelerates the granting of social security benefits and promised for months a tax incentive for companies to acquire new machinery and equipment —which took a long time to come to fruition due to lack of space to accommodate the resignation involved.

“Important expenses are being decided in very different instances”, warns Pires. For him, this makes good fiscal management difficult.