Government only meets fiscal target if it raises more R$ 162 billion – 07/12/2023 – Market

The federal government needs to raise an additional R$ 162.4 billion next year to ensure compliance with the goal of zeroing the deficit in 2024, shows a report released this Wednesday (12) by the National Treasury.

The value represents an extra effort in relation to the R$ 104.4 billion expected for 2024 from initiatives by the Ministry of Finance that have already come into force, such as the incorporation of funds stopped in the PIS/Pasep Fund and the resumption of PIS collection /Cofins on financial revenues of companies.

The size of the fiscal challenge is portrayed in the Fiscal Projections Report for the 1st half of 2023. The publication outlines a broad diagnosis of the situation of public accounts and provides projections for the next decade.

In practice, the government depends on measures equivalent to 2.2% of GDP (Gross Domestic Product), of which 0.9% of GDP corresponds to current actions and another 1.4% still needs to be put into practice.

The document’s estimates already take into account the approval of the new fiscal framework, a rule proposed by Minister Fernando Haddad (Finance) that maintains a spending limit, but less rigid than the ceiling created in the Michel Temer (MDB) government.

The proposal, still pending a new vote in the Chamber of Deputies, provides for an increase in the expenditure limit due to inflation plus a real percentage linked to the behavior of revenues —which can vary from 0.6% to 2.5% per year.

The new regime still obliges the government to follow primary result targets, observed from the difference between revenues and expenditures. At the beginning of the year, Haddad set the goal of zeroing in on the deficit by 2024 —a target considered ambitious by economists outside the government and which will require a sharp increase in revenue.

The dependence on new revenues is evidenced by the National Treasury report, which provides detailed elements for comparing scenarios.

Without the additional actions, the government would fail to meet all the fiscal targets already indicated until 2026, the last year in office of President Luiz Inácio Lula da Silva (PT), when it intends to reach a surplus equivalent to 1% of GDP. Not only would this promise be frustrated, but the country would also accumulate deficits in its accounts until 2028.

In the scenario with the implementation of the measures, the targets until 2026 would be fully met. In 2027, the settlement of debts from precatorios —judicial debts after a final sentence that had their payment in installments until 2026— causes a new deficit, but the accounts would return to the black already in the following year.

The Treasury makes the caveat that the report does not intend to recommend a recipe for measures to be adopted by the government, although it lists some possible options.

Among the examples, the document cites the decision of the STJ (Superior Court of Justice) to validate the collection of federal taxes on benefits obtained by companies in the ICMS, with a potential impact of BRL 70 billion a year. Other possibilities are revenue gains from the regulation of sports betting, improved inspection of imports and gains from the Income Tax reform.

The listed initiatives are already on the agenda of the Ministry of Finance, although some still depend on legal acts to have an effect on the public coffers.

At the end of June, the Sheet showed the backstage pressure on the government for the Federal Revenue to put on paper the collection estimates necessary for the government to achieve the target set for 2024.

In another passage, the Treasury points out that the additional revenue gain needs to be “permanent”, to help in meeting the goals also in 2025 and 2026 —years in which the hole is even bigger.

Even with the collection effort, the government will need to limit expenses to meet the targets. This means that, although the framework limit authorizes greater spending, it will be necessary to curb the transfers to avoid frustrating the goals set —or to find an even greater amount of revenue to unlock them.

In 2024, the necessary contingency would be BRL 56.5 billion, an amount that would reach BRL 63.9 billion in 2025 and BRL 76.2 billion in 2026.

The value may be lower if the pooling index is high — this happens when resources are released to the ministries, but are stopped by bureaucratic obstacles such as project problems.

The success or otherwise of the government in adopting the measures will have a direct impact on the trajectory of the public debt. Without the initiatives, the general government’s gross debt will continue to rise until 2029, when it would reach 82.1% of GDP, and only then will it begin to fall slowly. At the beginning of the next decade, in 2032, the indicator would still be at 81.3% of GDP.

With the implementation of collection actions, the debt would adopt a more benign trend, reaching 76% of GDP in 2024 and falling from 2025 onwards —with a hiccup in 2027 due to the expected obligation to pay precatorios accumulated in previous years.