Framework: primary deficit may persist until 2031 – 05/04/2023 – Market

The first economic scenarios outlined with parameters of the new fiscal rule proposed by the Ministry of Finance reinforce the perception that the government will have difficulties to put public accounts in the blue in the first years of the framework’s effectiveness.

In a report to clients, Warren Rena’s economic team says that it is possible to comply with the spending rule, but it is difficult to reach the target of the so-called primary result, which evaluates the relationship between government revenue and expenditure. In this context, public debt also tends to maintain an upward trend for a while.

Contacted by the report to comment on the projections, the Ministry of Finance stated, through its advisory, that it believes that the targets of the new fiscal framework are feasible and compatible with the measures that have been and will continue to be taken to recover the country’s fiscal base.

Warren Rena’s simulations indicate that, in the baseline scenario (the most likely), revenues would exceed expenditures, leading to the so-called primary surplus, only in 2032. In the most optimistic scenario, a surplus could be registered in 2027.

The Ministry of Finance projects short-term improvements in the primary result. The government’s expectation is that the deficit of around 0.5% of GDP (Gross Domestic Product) forecast for this year can be zeroed in 2024, and followed by surpluses of 0.5% and 1% in 2025 and 2026 , respectively.

“In our baseline scenario, this does not happen”, says Warren Rena’s chief economist, Felipe Salto, who participated in the creation and was the first executive director of the IFI (Instituição Fiscal Independente) of the Federal Senate, an organism that monitors public accounts . He was also Secretary of Finance of São Paulo (2022).

“Positive results would depend on a large volume of revenues, from additional or extra fiscal efforts, which so far are not guaranteed.”

Salto considers that, in fact, as stated by the Minister of Finance, Fernando Haddad, some measures could help in this effort, such as the end of the subsidy based on ICMS (which is being discussed in the Judiciary) and the reduction of tax expenses (discharges granted for sectors and regions that, in order to be changed, depend, in many cases, on Congressional approval).

“The subsidy based on ICMS is nonsense. It has to end. Reducing tax expenses is fundamental, and I hope the government succeeds”, says Salto. “But it’s not the most likely scenario today.”

In the case of subsidy, for example, the government won the STJ (Superior Court of Justice). The decision limited the possibility of companies using ICMS tax benefits to reduce the base of incidence of two federal taxes (IRPJ and CSLL). It was decided that the benefit is only valid when related to investments, and not current expenses, as many companies had adopted.

The practical effect of the measure had been suspended by Minister André Mendonça, of the STF (Federal Supreme Court), until the court also assesses the issue. This Thursday (4), however, Mendonça went back and validated the effects of the STJ decision. The Federal Revenue estimates that a final favorable decision could guarantee up to an additional R$90 billion.

The plenary of the STF would need to validate or not the decision of Mendonça. Going back, the STF minister says that the trial session becomes unnecessary and asks the Presidency of the Court to cancel it.

Salto, however, recalls that even if the government wins, the effective tax result will still depend on the behavior of companies, and also on how the states will react. In his estimates, the item would yield a maximum of R$ 42 billion for the Union.

The economist points out that the simulations make it clear that there will be an improvement in the trajectories of the main indicators, albeit in a longer term than announced.

“The spending rule improves the perspective of the primary result”, he says. “Without it, the deficit would be what you see in the pessimistic picture.” In this scenario, the deficit remains in this decade and at the beginning of the next.

The Warren Rena team also points to pressures on expenses.

The minimum wage growing by the GDP of two years before, for example, tends to put pressure on Social Security accounts, reducing the space for discretionary expenses.

The personnel policy also generates impacts. When one considers the possibility of readjustments for inflation, the account goes up a lot in relation to the base scenario, which only contemplates the vegetative rate of expansion of this expense.

The Warren Rena team also evaluated the projection of the General Government Gross Debt, the main indicator of public debt, together with the Net Public Sector Debt, in the base, optimistic and pessimistic scenarios.

The debt trajectory, says Salto, is not the best possible in the base scenario, for example, but the study shows that the framework does help to ward off the risk of a very bad fiscal scenario.

In the most recent report on these data, in March, gross debt was at 73% of GDP, and net debt at 57.2%.

In the base and pessimistic scenarios, the debt rises continuously, whereas in the pessimistic scenario, the pace is faster. The fall occurs only in the optimistic scenario.

Gross debt, in 2032, would reach 89.9% of GDP in the base scenario, and 104.2% in the pessimistic scenario. In the optimistic scenario, the debt would grow moderately to a peak of 77.7% in 2028, falling thereafter to 76.1%, a level lower than that currently registered.

Net debt would have a similar trajectory, but a slightly different outcome. In the baseline scenario, it would reach 75.16% of GDP. In the pessimistic, it would go to 89.63%. In the optimist, it would rise to 62.51% in 2027, falling to 60.17% of GDP in 2032, a value above the current one.

Like other economists, the Warren Rena team argues that the penalty mechanism for non-compliance with targets should be improved.

As a penalty, the proposal defines that the percentage applied on the actual variation in revenue changes from 70% to 50%, which reduces the correction of expenses for the year following the non-compliance.

“The primary rule becomes, with the fiscal framework approved, an auxiliary rule to activate mechanisms for adjusting expenses. It is an intelligent way of relating the two limitations —the primary target and the expenditure limit”, says Salto.

“However, it would be salutary to pull the spending cap trigger, from 50% to 20%, and that a list of automatic adjustment measures be foreseen or at least indicated, which could even be done through the LDO itself [Lei de Diretrizes Orçamentárias].”

The macroeconomic analysts Josué Pellegrini and Fernanda Castro signed the report together with Salto. The text was distributed to customers.

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WHAT PROPOSES THE NEW FISCAL FRAMEWORK
DETAILED IN THE DRAFT LAW COMPLEMENTARY 93/2023.

• PLP 93/2023 brings a correction rule for primary expenditure, based on revenue evolution, and a trajectory for the primary result until 2026
• Expenditure may grow, each year, at a maximum of 70% of the real variation in total primary revenue, net of transfers to states and municipalities, excluding revenues from dividends, concessions and exploitation of mineral resources
• The revenue variation will correspond to the ratio between the accumulated collection in 12 months until June of the previous year and the collection of the previous 12 months.
• The IPCA variation used to calculate the real revenue will be relative to the accumulated in 12 months until June of the previous year
• However, once the percentage of real variation in expenditure subject to the ceiling is found, 70% of the real variation in revenue, the percentage will be added to the inflation from January to December of the previous year to arrive at the percentage to be applied to the expenditure subject to the ceiling in the previous period , finally leading to the expenditure limit for the fiscal year
• It also brings minimum and maximum limits for the real increase in expenditure, of 0.6% and 2.5%, respectively, so that the described rule will only prevail when the 70% applied on the real variation in revenue is within of this interval
• Sets an investment floor of approximately R$75 billion for 2023, which must be maintained in real terms (adjusted for inflation) in subsequent years, ensuring that public investment will have its real value preserved in each annual budget
• In the event of non-compliance with the fiscal target, the percentage applied on the actual variation in revenue changes from 70% to 50%, reducing the correction of expenses for the year following the non-compliance
• Also in the event of non-compliance, the President of the Republic must send a message to Congress by May 31 to explain the reasons for non-compliance and corrective measures.