Government debt grows, but Lula wants license to spend more

The growth in tax collection in January, celebrated by the economic team, is far from signaling a balance in the accounts of the government of Luiz Inácio Lula da Silva (PT).

On the contrary. The market’s fear is that the brief breather provided by the extra revenue, coming from non-recurring events, will be seen by the current government as a “license to spend”, further aggravating the trajectory of public debt, considered worrying by the experts interviewed by the People’s Gazette.

And, in fact, the result of the first month of the year was enough for Lula to start talking about “increasing the spending limit” – a limit defined by the so-called fiscal framework, which has just come into force.

“The general outlook is not good. When we look at the most important indicator for government solvency in the medium and long term, public debt to GDP [Produto Interno Bruto]we see that it continues to grow”, warns Cristiane Schmidt, professor at the Getulio Vargas Foundation (FGV-RJ) and the Millenium Institute and senior consultant for the World Bank.

After two years of decline, the country’s public debt trajectory reversed in 2023 and rose almost three percentage points in one year, going from 71.7% of GDP in December 2022 to 74.3% of GDP 12 months later.

The latest data from the Central Bank reveals that in January 2024 the debt rose a little more and reached 75% of GDP, the highest level since July 2022.

Debt will continue to grow, according to market projections

According to the BC, the January primary result of the consolidated public sector – which includes the governments of the three spheres and state-owned companies – was negative by R$246 billion, in the 12-month period.

The deficit is only slightly smaller than that accumulated up to the previous month – R$249.1 billion, the worst result since 2020, when spending increased to combat the Covid-19 pandemic.

But the primary result does not reflect the financial expenses with the debt. And they have never been so loud. In one year, interest consumed R$746 billion, according to January data – the highest value in history for an accumulated 12 months, equivalent to four years of Bolsa Família.

As has been happening almost without respite since 2014, all interest was paid by issuing new debts, as the government is not saving money.

Adding the primary deficit and interest, the so-called nominal result of the public sector was an accumulated deficit of almost R$1 trillion in 12 months. The result was only worse than that in a few months between 2020 and 2021.

The perspective of brokerage XP, if the current pace is maintained, is that public debt will reach 77% of GDP by the end of 2024, 79% in 2025 and 81.4% in 2026. The median expectation of just over 30 banks , brokerages and consultancies consulted by the Central Bank is slightly worse: in this calculation, the debt at the end of the same three years would be 77.8%, 80% and 82.5% of GDP, respectively.

“Debt is an important variable that we have to monitor, because it represents a risk that has impacts both on economic activity, affecting growth, and on inflation”, says economist Tiago Sbardelotto, from XP Macro Watch.

Interest payments drive public debt

The public debt/GDP ratio is basically affected by the combination of interest rates, primary result and economic growth.

During the pandemic, what put pressure on the debt – which reached 87.7% of GDP in October 2020 – was the high primary deficit, driven by health spending. Interest expenses, thanks to the lower Selic at the time, were lower.

Today interest expenses are much higher. Despite the downward trend in the basic rate (the Selic), it is still at 11.25% per year, one of the highest in the world. The market’s estimated floor for Selic is 9% until the end of the year.

The BC’s monetary policy has been rigid for much of the last few decades in order to control inflation, as a result of the structural imbalance in government accounts.

“We see that, in fact, interest was an important component of debt growth in 2023, but it should reduce in the coming years, as the BC reduces the Selic. It should move towards having a much smaller share than had in the past”, predicts Sbardelotto.

The performance of the economy, another factor that weighs in the debt/GDP calculation, is insufficient. The country grew 2.9% in 2023, above market forecasts but below what was needed to offset the high primary deficit.

“What we saw last year and what we are seeing in the coming years is a strong contribution from the negative primary result to the increase in debt”, explains Sbardelotto.

Therefore, according to him, the balance between expenses and revenues to improve primary results is the only way to manage debt.

“Public spending is the only variable that the government has control over. Only by adjusting expenses and revenues would there be any ability to reduce the gap”, he says. “But this does not seem to be part of the strategy that the government chose, of making the adjustment only by increasing revenue and not by cutting expenses.”

The government announced a spending review policy last year and has a group in the Ministry of Planning to deal with the matter. Minister Simone Tebet signaled that there are things to be announced within a “planning culture”.

But this agenda is slow – nothing of impact has been announced so far – and there is a lot of skepticism. “I want to see this actually happen, because we have already had other attempts”, says Cristiane Schmidt.

Revenue increased, but did not alleviate government debt

In January, thanks to the collection projects negotiated by Minister Fernando Haddad, of Finance, with the National Congress, the sum of taxes, contributions and other federal revenues reached R$ 280.6 billion, a real increase (above inflation) of 6.7% compared to the same period in 2023.

Part of the result, the best result in the historical series, was due to the taxation of investments by the so-called “super-rich” and the re-encumbrance of fuel.

However, this did not prevent the increase in public debt during the month. For analysts, although the increase in revenue gives the government some room for maneuver in managing the 2024 Budget, it will be difficult to eliminate the deficit this year, as predicted by the fiscal framework.

“The fiscal result gave a breather to the government, which will not need to make the necessary contingencies in March to maintain the target”, says Schmidt. “But it is far from being a license to spend. More than 60% of the amounts are due to non-recurring taxes, which come once and go away. This is the case with offshore and exclusive funds.”

This month the first income and expenditure report of the year will be released, meeting the requirements of the Fiscal Responsibility Law. Until recently, there was a perception that the government would be forced to change the fiscal target if it did not want to block resources in March; with the most recent fiscal results, the need for change appears to have been postponed.

For the Millenium economist, even if Haddad manages to facilitate the government’s entire economic agenda with Congress, it would be difficult to maintain high revenue throughout the year to add the extra R$68 billion needed to close the gap.

“I would need to break a revenue record every month,” he says. “I’m very afraid of Lula and his ministers saying ‘well, we have enough money, we can spend it and we will spend it’. We are already seeing competitions being opened”, she observes.

Market expects new deficits in the coming years

Although the government must insist as far as possible on the target set by the fiscal framework, XP’s estimate is a primary deficit of 0.8% of GDP this year, 1.2% next year and 1% in 2026.

Sbardelotto highlights that the coming years of deficits will continue to push public debt to higher levels. To be able to control debt, the government would need to generate a surplus of 1.8% of GDP, the economist calculates.

“We see the government fighting to achieve zero results, and we know that it is already very difficult. Who will say, then, to reach this 1.8% surplus, which is what is necessary to stabilize the debt”, he says.

In the opinion of Reginaldo Nogueira, senior director at Ibmec, the market monitors the debt trajectory, but is not worried about an explosion or default in the short term because it sees the fiscal framework, although more fragile than the spending ceiling, as a sign of some restraint.

“The tax ends up having more of an impact on long-term interest rates”, he assesses. “But some indication of adjustment to contain public debt will have to be given by the government by the end of the year”, he predicts.