Fiscal disorder threatens economic indicators

The Minister of Institutional Relations, Alexandre Padilha, mentioned in a meeting with mayors of São Paulo, on October 7, the federal government’s intention to build an “economy triplex”, formed by economic growth, inflation control and unemployment reduction. . According to him, this perspective is close to becoming a reality, depending only on the approval this year by Congress of proposals focused on collecting more taxes, projecting extra revenues of R$170 billion annually from 2024 onwards.

But analysts consulted by People’s Gazette claim that Padilha’s optimism could succumb to tight deadlines, a worsening global scenario and possible disagreements with the Legislature, leading to chaos in public accounts.

Without hesitating to name the government’s three economic targets as a “triplex”, Padilha highlights the progress of these objectives, starting with the expectation of approval of the tax reform in the coming weeks. The report by senator Eduardo Braga (MDB-MA) will be read on October 24th and the plenary vote was scheduled for November 7th, later returning to the Chamber of Deputies. “Only with this, we can end the year with GDP above 3%, inflation below 4% and unemployment rate below 8%”, estimated the minister.

Later this month, Padilha counts on Congress’ approval for the taxation of exclusive funds and offshore funds, which he calls “the funds of the super-rich”. “The approval of these matters in 2023 does not harm the plan of Minister Fernando Haddad (Finance), towards combining social responsibility and fiscal responsibility, consolidating an environment favorable to the fall in interest rates and the return of investments”, he said. Despite this speech, the financial market has been reducing expectations that the government will achieve the promised zero deficit next year.

Marcus Pestana, executive director of the Independent Fiscal Institution (IFI), linked to the Senate, told members of the House’s Economic Affairs Committee (CAE) on October 10 that he was concerned about the evolution of public accounts. He recalled that it is no coincidence that the matters of greatest interest to the government under analysis in Congress deal with the topic, such as tax reform, the new governance of the Administrative Council for Tax Appeals (Carf) and the new fiscal framework. “This is the government’s main challenge, because the rampant fiscal imbalance causes an increase in its debt, in addition to inflation, high interest rates, recession and unemployment,” he warned.

Market analysts share this fear about public finances, especially when the power of the Legislature over the Budget grows, reducing the Executive’s room for maneuver, beyond what is expected from a vigilant Central Bank (BC). The first cuts in the basic interest rate (Selic) were based on meeting the fiscal targets defined in the framework. But this same confidence is weakening and the BC, faced with a possible inflationary outbreak generated by the fiscal disarray, will have to act, interrupting the Selic reduction in mid-2024.

“Guarujá Triplex”

The “triplex” nomenclature for economic measures is reminiscent of the apartment scandal in Guarujá (SP), which led to Lula being sentenced to a sentence of around nine years in prison.

But, in April 2021, the Federal Supreme Court (STF) declared the partiality of former judge Sergio Moro to judge the triplex case. Thus, the Court annulled Lula’s conviction and referred the investigation to the Federal Court in Brasília. The process should start from scratch, without the evidence collected by Lava Jato in Curitiba.

Subsequently, in January 2022, the 12th Federal Criminal Court of Brasília ordered the filing of the action against Lula in the case of the “Guarujá triplex”. The request to archive the case came from the Federal District Attorney’s Office, which pointed out that the charges against the PT member brought by Operation Lava Jato were time-barred.

War in the Middle East and American interest rates expose fiscal risk

The possibility of an escalation in the conflict between Israel and Hamas, also involving Iran, is already leading the concerns of investors in emerging market markets. After the Hamas attack on October 7, the rise in American interest rates and the slowdown in China began to take a backseat. The fear is that Brazil, if it becomes more disorganized in fiscal matters, will also increase its fragility in the face of external scenarios.

Asked about the impacts of the war in the Middle East on the national economy, since the conflict is already causing increases in the price of oil, projecting an increase in inflation and interest rates in the United States, the Minister of Finance, Fernando Haddad, said that “ This is not the time to make hasty decisions.”

The monthly political risk survey for the month of October, produced by the international consultancy BCW Brasil, revealed that measures such as the fiscal framework, in addition to the drop in unemployment and consumer confidence, helped to dispel initial pessimism with the Lula government. However, in the current situation, there are great expectations regarding the need for the government to approve projects to recover revenues and reach the goal of zero deficit in 2024. For the director of Public Affairs [Assuntos Públicos] from the consultancy, Eduardo Galvão, future fiscal challenges continue and doubts about fiscal policy “tend to generate pressure in the Brazilian political scenario”.

Federal tax collection did not keep up with the acceleration of economic growth, resulting in a loss of R$104.6 billion in the first eight months of the year, the largest recorded at the beginning of a new term since the implementation of the Real Plan. Analysts’ projections indicate that the federal deficit for 2024 should reach R$80 billion, which would be considered a failure in the first year under the new fiscal framework. As a result, public debt is expected to continue to grow in relation to Gross Domestic Product (GDP), from the current 74% towards 80%.

The perception of fiscal risk could also put pressure on the real and boost the dollar. Investors still have doubts whether the government will be able to approve the proposed measures to increase revenue in Congress. At this point, the dispute between the Ministry of Finance, which wants to maintain the goal of zero deficit, and the sectors of the government and Congress that demand flexibility in the goals, in other words the release of more resources in an election year, generates discomfort. In parallel, capital flight to the American market, where interest rates have reached record levels, will continue to challenge the economy.

The positive indicator comes from the trade balance, especially from agribusiness, which has partially compensated for this flight of dollars. The balance of foreign trade in 2023 could exceed US$90 billion, the highest in history.

Short deadline for voting forces search to define priorities

According to Marcus Deois, director of consultancy Ética, the holidays that occur in October and November create an obstacle to the progress of the government’s main economic agendas. He explained that this has resulted in a race against time and a highly complex effort to establish what are “the priorities among the priorities.”

One of them is the vote on the tax-collection package, which covers the taxation of exclusive funds, intended for people with high net worth, as well as interest on equity and tax incentives related to the tax on the circulation of goods and services (ICMS).

Another topic of great concern for the government and which is expected to move forward is the reduction in municipal tax (ISS), the renewal of payroll tax relief for 17 sectors of the economy, incentives for the superintendencies of the Amazon (Sudam) and Northeast ( Sudene) and the government’s vetoes to the so-called Carf Law.

The success of the tax reform (PEC 45/2019) in the Senate depends, in turn, on the report prepared by senator Eduardo Braga (MDB-AM), taking into account that its content will determine which economic actors will mobilize in favor or against the text. Marcus Deois also noted that this dynamic will have a direct impact on the speed at which the proposal is processed.

Lula’s first term benefited from the so-called “economic tripod” of the FHC era, which had the pillars: floating exchange rate, inflation target and fiscal target. These foundations guaranteed the country’s stability and growth at that time. The economic “triplex” is focused on results and not on means, which should also include spending control and not just revenue gains with the inclusion of new sources.