Doubts hanging over Haddad’s economic plan

About to complete a month in charge of the Brazilian economy, the Minister of Finance, Fernando Haddad, still has not convinced analysts and investors of the consistency of his plan to rebalance the federal cash flow and accelerate the growth of the Gross Domestic Product (GDP). Measures adopted so far have an air of improvisation, focusing mainly on increasing revenues to contain part of the increase in the public deficit and without clear information on the proposal for a new fiscal framework, to be sent to the National Congress.

On January 17, during his participation in the World Economic Forum, in Davos, Switzerland, Haddad told journalists that he will send “at the latest by April”, the rule that should replace the spending cap – currently the main fiscal anchor, which limits the expansion of government expenditures to inflation accumulated in the previous year.

The deadline cited by the minister is shorter than that required by Constitutional Amendment 126/2022, which was born from the Transition PEC, nicknamed the ceiling-piercing PEC or spending PEC, authorizing extra spending of around R$ 200 billion in 2023.

Haddad’s challenges to fulfill President Luiz Inácio Lula da Silva’s (PT) promises in the economy range from the high degree of rigidity in expenses, to pressure from political allies, uncertain scenarios and caution from economic agents. The electoral discourse of giving credibility to the macroeconomy, deconcentrating income and guaranteeing fiscal sustainability also collides with Lula’s persistence in attacking efforts to contain spending and threats of setbacks in the reforms approved from the Temer administration.

In Davos, Haddad repeated Lula’s catchphrase that the effort for fiscal balance “is not an end in itself”, preferring to emphasize agendas such as investment in technology, pro-reindustrialization policy and support for the renewable energy matrix. For the market, the highlighted initiatives only signal more interventionism. At the same time, the government is seeking business agreements with the country’s main trading partners, especially the European Union, China and Argentina, and is trying to block the independent Central Bank (BC) on interest rates.

In this context, financial market analysts have been raising projections for inflation in 2023 and 2024, according to the Focus report, by the Central Bank. The estimate for the Extended Consumer Price Index (IPCA) for this year rose for the seventh time in a row and now stands at 5.74%. The forecast for the basic interest rate (Selic) at the end of this year was maintained at 12.5%, somewhat above the level projected just five months ago (11.5%), which indicates that the market sees less room for cuts in the rate, currently at 13.75%.

Lula criticizes search for fiscal balance, Haddad tries to reverse bad expectations

Doubts about the government’s commitment to fiscal balance have been in the air since Lula’s victory in the elections. In November, he said that the spending ceiling was an attempt to “dismantle everything that belongs to the social area”. Later, the president called the fiscal rule “imbecility”. His speeches were added to those of ministers who point out supposed setbacks in Social Security, labor relations and the sanitation framework, and statements suggesting the political use of public banks and state-owned companies. Haddad tries to open paths in this difficult context.

To reverse bad expectations, the finance minister announced on the 12th a package with which he intends to reduce this year’s primary deficit, originally forecast at R$ 231.5 billion. The biggest bets are on measures to increase the chances of victory of the Tax Authorities in disputes in the Administrative Council of Tax Appeals (Carf), reencumbrance of some PIS/Cofins rates and renegotiation of debts of individuals and small companies. Also on the table is the end of the fuel exemption, scheduled for the beginning of March – which, if confirmed, will have an inflationary impact.

Economist Luiz Fernando Figueiredo, former director of the Central Bank, assesses that the measures announced by Haddad should actually reduce the primary deficit and slow down the growth of the public debt. But he has doubts about meeting the goal of fiscal balance from 2024. In favor of the minister would be his proximity to Lula, the cooperation of the Minister of Planning, Simone Tebet, and the stabilizing role of the independence of the monetary authority. On the other hand, Lula’s repeated statements against the fiscal balance keep uncertainty at high levels.

Figueiredo and other specialists consider that, having the highest debt among emerging countries, Brazil should pursue an annual primary surplus of 1.5% to 2.5% of GDP. But what is expected is a deficit. Until Lula’s election, the median of market projections pointed to a negative balance equivalent to 0.5% of GDP in 2023. The number gradually increased until it reached 1.2% of GDP, and more recently dropped to 1. 1%. This is also the Independent Fiscal Institution (IFI) primary deficit projection.

Haddad’s package was even received in the markets as an inaugural gesture towards fiscal sustainability. There is also the promise of other initiatives, such as the resumption of the tax reform centered on taxes on consumption, the review of beneficiaries of social programs, in addition to the new fiscal rule.

Concerned about the impact on public finances, the government abandoned – at least for now – the idea of ​​an additional increase in the minimum wage later this year. On the other hand, the re-encumbrance of fuels, which should have taken place on January 1st, was postponed for political reasons.

Announced to join the top echelon of the Ministry of Finance, economist Bernard Appy was only recently appointed to the position of extraordinary secretary for tax reform. Government leaders in Congress are looking for a solid parliamentary base to vote on Carf’s MP by May. In the wake would come the new fiscal framework, to be approved by June. And the promised change in the Income Tax would only last for the second half of the year.

The reform schedule, however, depends on the disposition of party leaders and the elections of the Chamber and Senate Boards, on the next 1st. “Putting the rich on the IR”, as Lula wants, reducing the chance of discounting medical expenses, to compensate taxpayers with lower incomes, has a fiscal impact that is too big to be negotiated this year, of up to R$ 100 billion.