Framework: Extra expense depends on 10% increase in revenue – 05/30/2023 – Market

The Lula government (PT) will need to come up with another BRL 120 billion in new revenue to be able to take advantage of the device of the new fiscal framework that authorizes extra spending in 2024, calculates the chief economist and partner at Warren Rena, Felipe Salto.

The value is much higher than the potential gain in new expenses, which he estimates at up to R$ 28.56 billion. The number also represents a real rise (after discounting inflation) in net revenue of almost 10%.

The difference occurs because, the way the text was constructed, it is not enough for the government to reach the revenue level that triggers additional spending. It is also necessary to meet the fiscal target stipulated by the economic team, which is to zero the deficit in 2024.

The accounts were made by Salto at the request of Sheet.

“The conclusion is interesting. It shows how difficult it is to meet the primary target. There is no point in having this mechanism to raise the limit if there is no room in the primary result. This is a good thing about the rule. The interaction of the two targets: spending and primary”, says he, who was once secretary of Finance of the State of São Paulo and executive director of the Senate’s IFI (Independent Fiscal Institution).

In a recent interview with Sheet, the secretary of the National Treasury, Rogério Ceron, had already warned that the government will not be able to carry out the extra expenditures if there is not an even greater volume of revenues to ensure compliance with the primary target. Otherwise, the government will have to set aside resources — the equivalent of giving with one hand and taking away with the other.

The divergence between the government and the market is about the size of the tax collection effort needed to reconcile all the rules.

The proposal for the new fiscal framework has already been approved by the Chamber of Deputies and is awaiting approval from the Federal Senate. The text predicts that the growth in the spending limit for the following year should be equivalent to 70% of the revenue variation in the 12 months accumulated until June of the previous year, already discounting inflation.

The percentage resulting from this calculation must respect the range of 0.6% to 2.5%. In practice, these are the floor and ceiling for advancing expenses, regardless of the country’s economic situation.

The government also needs to follow a primary result target, which next year is to zero the deficit (equalizing revenues and expenditures). There is a margin of tolerance of 0.25 percentage points of GDP (Gross Domestic Product) for more or less — around R$ 25 billion, currently.

The team of Minister Fernando Haddad (Finance) had expected to reach a 2.5% increase in the first year of the new framework, which would be enough to accommodate the stronger advance of some mandatory expenses, including the resumption of the floors constitutional rights of health and education at higher levels.

However, changes made by the rapporteur in the Chamber, deputy Cláudio Cajado (PP-BA), ended up restricting this potential to something around 1% to 1.5%, according to different estimates by the market and the government itself.

The tightening was recognized by members of the Lula government. “Today, the way the project is, it would have to cut discretionary expenses by around BRL 32 billion to BRL 40 billion [em relação ao previsto na Lei de Diretrizes Orçamentárias] because of the alteration that the rapporteur made”, said this Tuesday (30) the Minister of Planning and Budget, Simone Tebet (MDB).

In order not to completely frustrate the economic team’s plans, the rapporteur proposed a compromise, which was validated by the Chamber. The text foresees that the government will follow the general rule in the preparation of the 2024 Budget, but with the possibility of opening additional credits throughout the coming year up to the 2.5% increase limit, in case the collection for 2024 rises significantly. more expressive compared to 2023.

An isolated analysis of the rule would indicate that a real increase of 3.6% in revenue next year would already be enough to authorize the expansion of expenses (after all, 70% of 3.6% is equivalent to 2.5%).

However, without any additional revenue, the gap would be BRL 120 billion – failing to meet the goal of zeroing the primary deficit next year. “Soon, he would raise the limit to spend more, but he couldn’t spend it”, says Salto.

To reconcile all the requirements, the government would have to obtain a net revenue growth of at least R$ 100 billion. “This means a real increase of 8.7% compared to 2023, which is difficult, that is to say”, he says.

In this scenario, the result would be negative by 0.17% of GDP, estimates Salto. The space to spend, already considering the tolerance margin of the target, would be 0.08% of GDP — approximately R$ 10 billion.

Reaching the expenditure growth ceiling of 2.5% would require an even greater effort, given that expenditure expansion would amount to R$28.56 billion. Hence the need to reinforce revenues by R$ 120 billion.

“To meet the primary target and still be able to spend all the additional given by the 2.5%, he would need R$ 120 billion [em arrecadação]. In this case, net revenue would reach R$2.172 trillion. The real increase would be 9.7%”, says Salto.

The values ​​estimated by the economist are greater than the real increase of 5% in revenues that the government calculates as necessary to enable the extra expenses next year.

In recent weeks, the government won some victories in Congress that may help in the task of strengthening cash in 2024. Even so, achieving the goal of zeroing the public deficit next year is still a doubt among market analysts.

In government accounts, initiatives already validated by the Legislature and the Judiciary may yield at least R$ 130 billion to public coffers next year. Other actions may increase this value, but still require the approval of parliamentarians or a political decision by the Executive (such as the re-encumbrance of fuel, which alone can result in over R$ 60 billion).

Market accounts have been more timid. In addition, the government has also adopted some measures that give up revenue, such as the correction of the Income Tax table, the extension of incentives for the event sector and airline companies and a new stimulus program for the purchase of cars.

“Recipes help, but [o governo] will still have difficulties. It is not a liquid and certain resource, because it depends on several things, including the reactions of taxpayers and the Judiciary itself”, says Salto.