Federal government will help debtor states again

The Minister of Finance, Fernando Haddad, presents to the governors this Tuesday (26) a bill to renegotiate the states’ debt with the Union. The project comes in the wake of discussions with the leaders of the South and Southeast states, the most indebted in the country, which has been occurring since the beginning of the month.

The negotiations were led by the governor of Rio Grande do Sul, Eduardo Leite, but Haddad also met with governors Tarcísio de Freitas, from São Paulo, Romeu Zema, from Minas Gerais, and Cláudio Castro, from Rio de Janeiro.

The respective states alone concentrate 87% of the net consolidated debt of all entities of the federation, estimated at R$826.4 billion at the end of 2023. São Paulo, leader of the ranking, with R$293.47 billion in debt in 2023 is the least worrying, due to the thriving economy.

Minas Gerais, with R$ 166.13 billion; Rio de Janeiro, with R$154.91 billion; and Rio Grande do Sul, with R$104.90 billion in debt, appears as an extreme case, classified as over-indebted states.

According to information leaked to the press by government sources, the project will bring as a new parameter for correction the Broad National Consumer Price Index, IPCA, plus 3% per year. Today, debts are adjusted by IPCA plus a real rate of 4% per year.

The states request a fixed correction of 3% per year, in addition to the inventory review, which would provide a 15% reduction in the amount to be paid. The claim was considered unfeasible by the economic team and the project has already received approval from President Luiz Inácio Lula da Silva (PT). Nothing indicates that the proposal will bring an end to the impasse.

Structural debt is financed by the Treasury

The practice of renegotiating state debts has been recurring since 1997, when the first major consolidation of debts was carried out after the Real Plan. Since then, whenever states face imbalances in their accounts, they appeal to the Treasury and obtain debt relief.

Debts are made through direct loans from the federal government or via credit from the financial market, in which entities establish the Union as guarantor. In February 2024, for example, the National Treasury paid R$1.22 billion in late state debts, according to the Report on Guarantees Honored by the Union in Credit Operations.

Generally, the Treasury charges counter-guarantees, such as withholding transfers from the Union to the debtor state – revenues from participation funds and Tax on the Circulation of Goods and Services (ICMS), in addition to fines, interest and operational costs.

In recent years, however, decisions by the Federal Supreme Court (STF) prevented the execution of counter-guarantees from several states in financial difficulty. The Court also mediated negotiations for the inclusion or continuity of state governments in the fiscal recovery regime (RRF), which provides for the installments and staggering of debts with the Union in exchange for a spending adjustment plan. Goiás, Rio de Janeiro and Rio Grande do Sul signed agreements with the federal government.

Change in the ICMS model worsened the fiscal situation

In 2022, the cyclical problem of paying states’ debts to the Union was aggravated by the law that limited the collection of the Tax on Circulation of Goods (ICMS) on fuels, electricity and communications, promoted by former president Jair Bolsonaro, in the context of the presidential elections.

Haddad repeatedly criticized the decision, which, according to him, harmed the governors with a tax exemption not approved in their assemblies that resulted in an estimated loss of R$80 billion in revenue. The Ministry of Finance claims to have already disbursed R$14.8 billion to states and municipalities as compensation for the reduction in ICMS. In 2025, the government will still have to pay another R$4.5 billion, totaling R$27 billion.

Furthermore, the states were included in the tax reform with two financial funds whose contributions will total R$790 billion over the next 20 years. The first, a compensation fund for ICMS tax and financial-fiscal benefits, to replace the current state incentives that today cause the so-called tax war. The second, the National Regional Development Fund (FNDR), aims to reduce regional and social inequalities.

Even so, changes to the ICMS model have been used as an argument for state governments to intensify collection. According to a survey by the National Committee of Finance Secretaries of the States and the Federal District (Comsefaz), ten states and the Federal District will increase taxes throughout this year.

Proposal provides for budgetary obligations

The government’s proposed bill should impose an obligation on governors to apply budget surpluses resulting from renegotiation in structural and social investments. The idea is to avoid personnel costs, which have occurred with salary adjustments by state governments, despite the lack of resources.

The increase in payroll expenses and the lower growth in revenue have worsened the fiscal situation of the states in a generalized way. Since last year, state governments have come up against the personnel spending limit established by the Fiscal Responsibility Law (LRF).

According to the National Treasury Secretariat, in the 12 months up to August 2023, eight federative units had exceeded the so-called prudential spending limit on Executive Branch civil servants, which corresponds to 95% of the legal ceiling: Rio Grande do Sul, Paraíba, Rio de Janeiro, Amapá, Minas Gerais, Acre, Roraima and Rio Grande do Norte.

The argument made by technicians from the state finance departments is that it is not possible to keep salaries frozen. But the control of public spending and readjustments of state employees are in the sights of public and private agents.

The case of Rio de Janeiro, which has been in the RRF since 2017, is emblematic. Treasury data indicate that, in the last two years, Rio spent more on expanding personnel than on paying its debt. Between 2021 and 2023, the payroll increase was R$17.5 billion, including Legislative and Judiciary, while the state paid only R$5.6 billion of its debt.

Front of dissatisfaction from good paying states

In addition to the watchful eye of the Union, an investigation of the Folha de S. Paulo realized that, with the government’s decision to renegotiate, a front of dissatisfaction was opened among governors of the North and Northeast. The main beneficiaries of the renegotiation in the region are Bahia, Pernambuco and Alagoas, but with a much smaller amount of debt, R$43 billion.

Less indebted, they criticize the flexibility for federal entities that failed to comply with rules, granted adjustments without due compensation or went to court for not paying debt installments on time.

They still demand compensation for their regions, with measures that “reward” good payers, such as more access to credit for investments, lower interest rates and priority in indicating PAC (Growth Acceleration Program) projects.

The government’s proposal is eagerly awaited. Economists and parliamentarians see different solutions to the issue. Felipe Salto, from Warren Investimentos, told The globe that the bill with a new debt calculation indicator will not solve the structural problem of the states’ deficit, which involves cutting spending and lengthening deadlines.

Deputy Pedro Paulo (PSD-RJ) defends the creation of a “Desenrola” for over-indebted states, with an initial cut of 15% in the debt stock and additional discounts in three magnitudes – 5%, 10% and 15% -, as states improve social indicators.

Governor Cláudio Castro, who had already expressed his willingness to appeal to the STF to re-discuss the debt, told Brazil Agency who expects an agreement from the meeting with Haddad. “We have to wait until the 26th for us to try, in another round of negotiations, to put forward what Rio de Janeiro understands as fair”, said Castro. For him, in addition to the nature of the debt itself, the state wants deal with future indexers, interest and fines and the review of the tax recovery regime.