Government may reduce spending blocks in an election year if it forecasts a deficit in 2024; understand

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Current planning foresees ‘zero deficit’ in federal accounts, which could lead the government to hold back expenses – especially investment. Including a deficit in the target, however, would increase public debt. Ministry of Infrastructure opens public consultation aimed at reviewing the Santos Organized Port area Santos City Hall The open discussion in the federal government about the fiscal target for 2024 – revealed by a statement by President Luiz Inácio Lula da Silva at the end of October – goes further impact on government reports and investor confidence. A possible change in the target, to forecast a public deficit next year, would help the government to minimize spending cuts to fulfill its promises. And with this, reducing the impact on investments in infrastructure, such as works under the new Growth Acceleration Program (PAC), in the middle of the year of municipal elections. The explanation, given by experts to g1 and TV Globo, is linked to the “fiscal framework”, that is, to the new public accounts rule approved by the National Congress in August this year. The mechanism came to replace the old spending cap – which was in effect between 2017 and the middle of this year. ▶️ The fiscal target establishes what the balance (or maximum imbalance) should be between what the government collects and what it spends. ▶️ So far, the Executive has included in the budget projects for 2024 a “zero deficit” target – that is, spending only the amount collected, without taking on debt. ▶️ The problem is that, for this forecast, the economic area included revenue expectations that have not yet been approved by Congress and, perhaps, will not be realized. ▶️ If this happens, the government will need to cut spending to ensure balance. The greater the imbalance, the greater the need for cutting. ▶️ Therefore, the government began to discuss exchanging the zero deficit for a negative result of 0.25% to 0.5% of GDP. This way, you could cut fewer expenses and maintain more investments. “Having the obligation to contingency [bloquear recursos], the government must adopt measures on the revenue side. And if you can’t balance it, you’ll have to cut discretionary spending. [gasto livre dos ministérios] (…) Investment ends up being affected, and reduces its reach a little in an election year”, stated Ricardo Volpe, consultant to the Chamber. According to Vilma Pinto, director of the Independent Fiscal Institution (IFI) of the Federal Senate, there are greater uncertainty about obtaining extraordinary revenue, sought by the economic team, to try to eliminate the fiscal deficit in 2024. “The difficulty of achieving the necessary volume of revenue in a short space of time may be motivating the discussion (..) Case the target is revised downwards, the volume to be contingency [bloqueado] could be lower, since the achievement of this target will be less uncertain than the current one”, assessed Vilma Pinto, from the Independent Fiscal Institution. Changing the fiscal target Indications that the 2024 fiscal target could be changed began on October 27, when Lula told journalists that the country did not need a zero fiscal target next year. “I don’t want to cut construction investments. If Brazil has a deficit of 0.5%, what is it? From 0.25%. What is it? Nothing”, said Lula last week. This Friday (2), Lula once again defended that the government makes investments and said that “good money is money transformed into work”. Throughout the week, the Minister of Finance, Fernando Haddad, got angry with journalists and avoided answering whether next year’s target would be changed. the rapporteur of the 2024 LDO proposal, deputy Danilo Forte (União-CE), has already admitted that it can be revised. The text still needs to be voted on by the Chamber and Senate. According to the blog of GloboNews journalist Gerson Camarotti, columnist for g1, the new fiscal target for 2024 will be presented by amendment to the Budgetary Guidelines Bill (PLDO) on November 16, with a deficit forecast around 0.5%, according to sources. In conversations with President Lula in recent days, minister Fernando Haddad is trying to convince him to take the decision on changing the fiscal target only in March, when the economic area needs to present the report of income and expenses. The information is from journalist Ana Flor’s blog. Haddad gets irritated by question about fiscal deficit and abandons interview Fiscal framework In the first version of the fiscal framework, sent by the economic area to the National Congress, the proposal was to end the so-called “preventive blockages” of budgetary resources to achieve fiscal targets. The text, however, was changed by the rapporteur in the Chamber of Deputies, Cláudio Cajado (PP-BA), and the preventive blocks (to achieve the goals, which existed in the previous rule, of the spending ceiling) were maintained in the fiscal rule. Vilma Pinto, from the Independent Fiscal Institution, also recalls that the rapporteur included another device that prevents blocking of more than 25% of so-called “discretionary expenses” – free government spending that can be cut. Among the “discretionary” expenses are expenses from ministries – including areas in health and education and, mainly, investments in infrastructure. On the other hand, there are mandatory expenses, such as social security benefits and civil servants’ salaries, which cannot be blocked. The objective of limiting the blocking of free expenses to 25% of the total value – included in the fiscal framework approved by the Legislature and sanctioned by President Luiz Inácio Lula da Silva – is to “preserve a minimum level of discretionary expenses necessary for the regular functioning of public administration “. According to a technical note from the Budget and Financial Inspection Consultancy (Conof) of the Chamber of Deputies on the fiscal framework, however, this core of 25% in expenses that cannot be blocked does not include projects and investments – as these do not encompass the ” functioning” of the public machine. “I don’t believe the target is feasible”, says economist about fiscal balance in 2024 Federal revenue To achieve the fiscal target, the government relies on two variables: federal revenue and public spending. If revenue does not perform well, for example, the government may be forced to block expenses to achieve the fiscal target set out in the Budgetary Guidelines Law. And the official federal revenue numbers are not good. In September, the fourth consecutive drop was recorded. And in the first nine months of this year, the real decline was 0.8% compared to the same period last year. The Federal Revenue’s explanation is that factors registered in 2022, such as the rise in prices of basic products (such as iron ore and oil) are no longer present. This is related to the slowdown in the world economy in a scenario of rising interest rates in several countries to contain inflation. At the same time, the measures that the economic area seeks to pass in Congress to increase revenue, such as charging offshore and exclusive funds, changes in the interest mechanism on companies’ equity, or even the end of subsidies given by states with an impact on federal taxes, are moving at a slow pace. The economic team’s calculation is that R$168 billion more in revenue will be needed to reach the goal of zeroing the deficit in government accounts in 2024. Given the poor performance of revenue in recent months, as a result of the slowdown in the world economy , and the difficulty in approving measures in the Legislature, increases the likelihood of blocking spending to meet the 2024 fiscal target – if it is maintained at zero deficit. Point by point The federal budget proposal for 2024 foresees R$211.9 billion for “discretionary” spending, which cannot be blocked. In this way, possible expenditure blocks could reach up to R$53 billion (25% of the total). With a target of zeroing the government deficit in 2024 and slowing revenue, there is a greater likelihood of having to carry out a preventive blockade of resources to achieve it. These blockades (with zero deficit), which would mainly affect investments in infrastructure, including expenses from the Growth Acceleration Program (PAC), would take place in a year of municipal elections. If the target is reduced to a fiscal deficit, the probability of the government having to block public investments is reduced. Julia Duailibi comments on the discussion around the fiscal target Impact on public debt Analysts point out that, by changing the fiscal target to a deficit in 2024, instead of a result close to zero, the difference will be financed through an increase in public debt. “The way forward is to recognize a larger deficit and finance it as debt. Interest rates will be pressured, and inflation continues to be pressured with the issuance of currency [por meio de títulos públicos no mercado]. And, also, the investor withdraws productive investment as he remains insecure”, assessed Ricardo Volpe, consultant at the Chamber. In August, the debt of the consolidated public sector amounted to 74.4% of GDP – the equivalent of R$ 7.77 trillion . In comparison with the end of 2022, when it was R$7.22 trillion, or 72.9% of GDP (updated data), however, there was an increase of 1.5 percentage points. The rebalancing of public accounts is considered important by the financial market to avoid a spike in Brazilian debt – an indicator that is closely monitored by risk rating agencies. Even with the proposed fiscal framework, financial market analysts estimated, last week, that Brazilian public debt should reach 87.2% of GDP in 2032. At around 90% of GDP, Brazilian debt could surpass the level of emerging nations and be well above that estimated by the International Monetary Fund (IMF) for Latin America. The forecasts, however , only last until 2027.

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