Fiscal target was changed in 14 of the 23 years of the Fiscal Responsibility Law – 11/16/2023 – Market

With the postponement of the debate on the fiscal target until next year, the possibility of changing the target for public accounts in March is gaining momentum in the government. It would not be the first time that a change occurred during the execution of the Budget.

The revision of the fiscal target appears as a frequent solution adopted by different governments since the approval of the LRF (Fiscal Responsibility Law).

Over 23 years, there was a change in the target pursued by fiscal policy in 14 years, generally to authorize worse financial performance than initially promised.

The strategies were the most diverse and ranged from changing the number to be achieved to discounting amounts related to investments in the PAC (Growth Acceleration Program) or tax exemptions — an expedient criticized by economists in the past for compromising the credibility of the fiscal target itself. .

When presenting the new fiscal framework, Haddad signaled his intention to bring the deficit to zero by 2024, an objective recognized as “ambitious” by the Executive’s own members.

To reach the target, set out in the LDO proposal (Budget Guidelines Law) sent by the government to Congress, the minister needs to be successful in obtaining R$168.5 billion in extra revenue. This is considered unlikely by economists and the political wing of the government itself.

At the end of October, in a coffee with journalists at Palácio do Planalto, President Luiz Inácio Lula da Silva (PT) said that the fiscal target does not need to be zero and that this result will hardly be achieved, as he does not want to make cuts in investments and works next year.

For one wing of the government, a deficit corresponding to 0.5% of GDP (Gross Domestic Product) would not be a problem. The PT member’s speech gave the password to members of the political nucleus, who began to press for a change in the target of the 2024 fiscal policy.

This Thursday (16), Minister Alexandre Padilha (Institutional Relations) stated that the Executive will not act for a change. “There is not and will not be any initiative from the government to change this fiscal target,” said Padilha.

The LDO rapporteur, deputy Danilo Forte (União Brasil-CE), stated after meeting with the economic team that the government maintained the zero fiscal target, but cited the possibility of review “in the future”.

Under the goal of zero deficit, economists estimate that Haddad will need to impose, at the beginning of next year, a billion-dollar brake on spending to avoid exceeding the target in the first year of the new fiscal framework.

The new fiscal rule requires the manager to adopt measures to avoid non-compliance with the target and provides that the limit can reach 25% of discretionary expenses, a non-mandatory part of expenses that includes funding and investments.

This means that the contingency could reach R$53 billion. As uncertainties already exceed this value, the experts’ preliminary assessment is that there is a high risk of the government starting 2024 under a significant lockdown — something that Lula said he did not want.

The initial version of the new fiscal framework, proposed by Haddad’s team, did not foresee the need for contingencies. The expenditure limit was given by the rule, and the result of public accounts would be like an adjustment variable, fluctuating according to the inflow of revenue into the government’s treasury.

The solution was poorly received by the market and by members of Congress, who worked to include the duty to contingency resources in the event of a threat to the fiscal target.

The Legislature’s decision ended up giving even more weight to Haddad’s ambitious objectives, since his frustration could generate practical consequences —unwanted by politicians who want to keep expenses intact and growing.

Behind the scenes, a wing of the government sees Haddad’s decision to promise a zero deficit by 2024 as a political mistake. This group’s assessment is that the market would understand a signal, from the beginning, of a continuous, albeit more gradual, adjustment. Now, any relaxation of the target will bring more wear and tear.

Government representatives cite, with reservation, the strategy of former Finance Minister Henrique Meirelles as an example.

Upon taking office, after the impeachment of Dilma Rousseff (PT), Meirelles changed the 2016 target to a deficit of up to R$170.5 billion. At the time, the assessment was that the number contained a fat — the actual result was actually better, with a deficit of R$159.5 billion, in values ​​at the time.

In 2017, Meirelles faced a drop in revenue, attributed at the time to the rapid slowdown in inflation. The minister even proposed a menu of measures to increase revenue, including increasing taxes, which was rejected by the political wing.

In August of that year, Meirelles announced the review of the 2017 and 2018 targets (which had been sanctioned the day before). The targets, previously negative at R$139 billion and R$129 billion, respectively, were changed to a deficit of up to R$159 billion in both exercises.

In the end, the then government of Michel Temer (MDB) ended up delivering even better results than those set in the initial goals. The result was negative between R$116 billion and R$118 billion in both years.

The view of PT members is that Meirelles set looser goals and delivered better results, which could generate a perception of greater fiscal effort than mandatory.

Still in the view of this wing, by proposing bolder objectives, Haddad runs the risk of frustrating expectations, even if he manages to go half way along the desired path — which would already be a considerable fundraising effort.

At the Treasury, ambitious fiscal targets are seen as a motivator to seek the revenue measures necessary to rebalance the accounts. For this reason, Haddad’s team resisted a change in the target of fiscal policy, given the risk that this would demobilize Congress in approving the initiatives in progress.

The Central Bank echoes the position of the Ministry of Finance and defends the importance of the government persisting in its objective to demonstrate commitment to fiscal rebalancing — something that could even influence the institution’s interest rate decisions.