Government must block from R$5 billion to R$15 billion in the Budget – 03/15/2024 – Market

The government of Luiz Inácio Lula da Silva (PT) may need to block R$5 billion to R$15 billion to avoid exceeding the expenditure limit provided for in the new fiscal framework.

This is not a contingency, another type of lock used when the primary outcome goal is at risk.

According to technicians interviewed by Sheet, the increase in revenue will help keep the deficit within the tolerance margin of up to 0.25% of GDP (Gross Domestic Product). Therefore, the contingency must be close to zero.

The blocking of expenses will be necessary because mandatory expenses with Social Security, BPC (Continuous Payment Benefit) and Proagro (Agricultural Activity Guarantee Program) are growing.

To avoid the risk of running out of money for these actions, the economic team needs to hold back ministries’ spending in a preventive manner, until it has greater clarity on the progress of policies throughout the year.

The definitive value of the blockade is still under discussion within the government and may vary, as technicians continue to update projections. The first bimonthly revenue and expenditure assessment report will be sent to Congress next Friday (22).

One of the key elements for the calculation is the technical report from the Social Security working group, which is refining the numbers of what should be saved with the benefits review.

Technicians are working to show that the review of Social Security spending could reach R$10 billion. Technical note, however, will need to show that this scenario is feasible to be achieved with the work that the INSS (National Social Security Institute) is doing to detect fraud.

The technical basis for expense reviews is a requirement of the TCU (Federal Audit Court), which usually analyzes in detail the assumptions used in the estimates.

The government’s main bet to cut expenses is Atestmed, a system that receives online medical certificates for sick pay requests, eliminating the need for an in-person examination. The tool uses artificial intelligence to cross-reference data and detect forgeries and fraud.

According to government technicians, the savings with Atestmed should be more than R$5.5 billion. The value considers the use of the system in around 85% of the analyzes of sickness benefit applications until June — in December, this proportion was almost 50%.

According to technicians, the agility of the system prevents payment of the benefit for a longer period than necessary. The average duration of aid granted via Atestmed is between 60 and 70 days, compared to 300 days for a benefit that must await an in-person examination.

The technical group is also mapping other actions that can save resources. In recent days, there was already an indication of the possibility of saving R$ 2.15 billion with the detection of inconsistencies in aid, R$ 1.8 billion with the prevention and containment of social security fraud, R$ 767 million with administrative collection of undue benefits and R $570 million on information security tools.

A member of the team involved in preparing the report told the Sheet that, if the review works as expected, the blockade will be below R$10 billion. In the government’s view, this would consolidate a benign scenario for public accounts, very different from the concerns of a few months ago, when the fiscal debate was about the size of the contingency that Minister Fernando Haddad (Finance) would have to make to meet the target of zero deficit.

In an interview with Sheet published at the beginning of February, the Secretary of the National Treasury, Rogério Ceron, anticipated that the revenue gains would help the government to close the first report with a contingency close to zero. The strategy now is to use this breath to postpone any possible debate on easing the fiscal target for the second half of the year.

In the scenarios under discussion for the first report, if the government manages to guarantee a partial review of INSS spending, the blockade could be between R$10 billion and R$15 billion.

Even with all this effort, the need to cover expenses exists because the INSS payroll is growing due to the faster granting of benefits. Therefore, the increase in social security spending, which could still be around R$15 billion.

Last Wednesday (13), Minister Carlos Lupi (Social Security) recognized that spending in the area should expand this year. “All this impact [das concessões] push [o gasto] up. [Mesmo] With all this economy, this equation is impossible to reduce. You can reduce the final impact, as we will with Atestmed. But it has an impact, there’s nothing you can do about it,” he said.

The blockade will be applied to ministries’ expenses, but cannot affect health expenses, which are already close to the minimum value determined by the Constitution. Technicians recognize that the blockade should affect investments, but the expectation is that this will not compromise the execution of projects, which have a longer maturity period.

In Minha Casa, Minha Vida, for example, a good part of the R$7.8 billion invested in band 1 of the program last year is still in the FAR (Residential Lease Fund) and can be used to manage the flow of payments.

For technicians, the first bimonthly assessment of the Budget may also signal that the government is close to being able to take advantage of the increase of around R$15 billion authorized by the fiscal framework as of May.

The rule allows the use of this space in the event of an increase in revenue, but its implementation is subject to meeting the target. In practice, incorporating this value can compensate for the initial blockage without needing to change the fiscal target.

President Lula himself, in a speech last week, addressed this possibility when he said that the increase in federal revenue would give rise to a discussion with the National Congress to increase public spending. It was a signal to parliamentarians about the replacement of part of the R$5.6 billion in amendments that were vetoed by him when sanctioning this year’s budget.

As Lula did not cite credit, his speech was initially interpreted as an attempt to change the rules of the framework.

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UNDERSTAND THE DIFFERENCE BETWEEN BLOCKADE AND CONTINGENCY

The new fiscal framework determines that the government must observe two rules: a spending limit and a primary result target (verified based on the difference between revenues and expenses, minus public debt service).

Throughout the year, as projections for economic activity, inflation or ministries’ own needs to honor mandatory expenses change, the government may need to make adjustments to ensure compliance with both rules.

If the scenario is for an increase in mandatory expenses, it is necessary to block it.

If the estimates point to a loss of revenue, the appropriate instrument is contingency.

How blocking works

The government follows an expenditure limit, distributed between mandatory expenditures (social security benefits, civil servant salaries, Health and Education minimums) and discretionary expenditures (investments and funding of administrative activities).

When the projection of a mandatory expense rises, the government needs to block discretionary expenses to ensure that there will be enough space within the Budget to honor all obligations.

How contingency works

The government follows a fiscal target, which shows whether there is a commitment to collect more than it spends (surplus) or whether expenses are expected to exceed revenues (deficit). This year, the government set a zero target, which assumes a balance between revenues and expenses.

As expenditure cannot rise beyond the limit, the main risk to meeting the target comes from fluctuations in revenue. If projections indicate less robust revenue, the government can replace the amount with other measures, as long as they are technically substantiated, or make a contingency on expenses.

Can there be a blocking and contingency situation together?

Yes. This is not the current scenario, but it is possible that, in a hypothetical situation of worsening revenue and an increase in mandatory expenses, the government will need to apply both the blockade and the contingency. In this case, the impact on discretionary expenses would be the sum of the two values.