Framework: public debt rises until the end of Lula’s term – 03/30/2023 – Market

When presenting the new proposal for a fiscal rule, the Ministry of Finance promised this Thursday (30) to deliver a smaller deficit in public accounts in 2023, equivalent to 0.5% of GDP (Gross Domestic Product).

The data indicates that the Minister of Finance, Fernando Haddad, aims for a more ambitious adjustment than what had been signaled until then, which was a gap of up to 1% of GDP.

Despite this, the ministry has not yet detailed how the promised result will be achieved, given that the bimonthly Budget report, released last week, estimates the deficit at R$ 107.6 billion for this year.

The new target of 0.5% of GDP would have a range of plus or minus 0.25 percentage points. This means that the effective result could be between a deficit of 0.25% and 0.75% of GDP.

The same logic, with bands for fluctuation of the result, will apply for the coming years.

In 2024, the target is a zero deficit, but the interval allows it to vary from a negative result of 0.25% to a positive result of 0.25% of GDP. In 2025, the range ranges from 0.25% to 0.75% of GDP, centered on the 0.5% target.

In 2026, the expectation is to reach a surplus of 1% of GDP, oscillating between 0.75% and 1.25%.

The government also presented estimates of how the public debt could behave, if the economic team manages to deliver the promised fiscal efforts each year. In all cases, there are signs that the government of Luiz Inácio Lula da Silva (PT) will deliver a gross debt greater than what it found at the end of 2022, when it was at 72.87% of GDP.

The ministry outlined two scenarios. One of them predicts reaching the center of the primary target in all four years of Lula’s government.

In this context, the GGGD (general government gross debt) would end this year at 75.11% of GDP, rising to 76.54% in 2026.

In another scenario, in which actual primary results are situated in the lower band of the target between 2024 and 2026, the debt rises more significantly. This year, the DBGG would remain at the same 75.11% (since the government considered the deficit to be 0.5% of GDP), but would rise to 76.43% in 2024 and 77.34% in 2026.

The economic team, however, expects a reduction in medium and long-term interest rates with the presentation of the new fiscal rule. The assessment is that the proposal will provide more security and predictability of the trajectory of public accounts.

If the yield curve has a reduction equivalent to 1 percentage point, the gross debt would end this year at 75.07% of GDP and would remain stable at 75.05% of GDP at the end of 2026, if the primary is at the center of the targets of each year. If the effort is lower, at the lower end of the band, the debt would still rise to 75.83% of GDP in 2026.

If the yield curve has a greater relief, of 2 percentage points, the debt ends 2023 at 75.03% of GDP and falls to 74.36% of GDP in the least favorable scenario and 73.58% of GDP in the baseline scenario , which considers the center of primary goals.

The Ministry of Finance also made projections for spending on debt interest. According to the folder, the new fiscal framework will allow a reduction of BRL 80 billion in these expenses already in 2023. The effect of the new fiscal framework would be a reduction of BRL 186 billion in 2026.