Government pushes change in fiscal target for 2nd semester – 03/09/2024 – Market

The government of Luiz Inácio Lula da Silva (PT) wants to use the revenue gains at the beginning of 2024 to push the discussion about a possible change in the fiscal target for the second half of this year.

The central objective of the strategy is to guarantee a favorable environment for the Central Bank to continue cutting the basic interest rate, the Selic, currently at 11.25% per year.

The economic team considers it ideal to have at least three additional reductions of 0.5 percentage points each, at the March, May and June meetings of the Copom (Monetary Policy Committee).

The government’s focus, according to interlocutors, is to “give a stronger fiscal signal” so that the Selic returns to single digits for the first time since February 2022. Making the target of fiscal policy more flexible before the bimonthly report in July could abort the process and cause Selic to park at a higher level.

The Central Bank has already conveyed, on more than one occasion, the message that it is important for the government to persevere in the search for zero deficit, although it says that there is no mechanical relationship between the fiscal framework and the decision on interest rates.

The plan to postpone the debate on the goal, however, has political risks. In a scenario of frustrated revenues, the late submission of the bill to make it more flexible tends to find a National Congress already emptied by municipal elections. To achieve rapid approval of a government text, only in the case of prior agreement, say parliamentarians.

Without approval from the Legislature, the economic team would continue to be obliged to pursue a zero deficit and implement billion-dollar contingencies in the event of revenue frustration, as simply sending the proposal is not a safe conduct to ease spending.

Furthermore, the Congress leadership is putting pressure on the government to resolve the impasse surrounding the R$5.6 billion in commission amendments that were vetoed by the president, to make way for the Executive’s own expenses with policies such as Gas Aid and Popular Pharmacy.

As shown by Sheetmembers of the government entered the field to convince congressmen to wait until the end of March, when the first Budget evaluation report comes out, to have a clearer position on the possibility of replacing the money from the amendments.

According to interlocutors, the president of the Chamber, Arthur Lira (PP-AL), signaled agreement with the request, but has been pushing for the issue to be resolved by the beginning of April.

Parliamentarians urgently need to replenish the funds to be able to start the process of executing expenses before the electoral period, when there are restrictions on the signing of new agreements. Making these instruments viable is seen as a priority by congressmen to ensure the sending of money to their strongholds in a year of local disputes.

The risk of increased mobilization of civil servants is also on the radar, putting pressure on the Executive to find funds to grant readjustments.

To resolve these problems, the government has the possibility of opening additional credit of around R$16 billion in the May assessment report, thanks to a special rule valid in 2024 approved in the new fiscal framework.

The device allows the Executive to increase its expenses to achieve the maximum real expansion of 2.5% authorized by the framework rule (today, the approved Budget includes a correction of 1.7% above inflation).

To achieve this, the bimonthly reevaluation in May must indicate an increase in revenue of at least 3.6% above inflation this year in relation to 2023 — which must be achieved even if the government recognizes revenue frustration.

The problem is that there is an understanding that credit can only be used if the balance between revenues and expenses is within the tolerance margin of the fiscal target, which allows a deficit of up to R$29 billion without the need to block resources.

With lower revenue and higher spending, making the target more flexible in May could be necessary to unlock the use of additional credit.

Experienced technicians consider that, even if the review of the fiscal policy target takes place at the end of May, the risk of delay in the vote remains.

Parliamentarians will already be involved in the political negotiations that precede the party conventions, which from July 20th will deliberate on coalitions and nominate their candidates.

Last year, even without elections, Congress held only seven joint sessions, three of them in December. The number is considered low and is seen as a poor indication of legislative activity this year.

Government interlocutors recognize that pushing the change in target to the second half of the year could turn into a “very difficult” challenge. But the current discourse is that it is still premature to debate whether flexibility will actually be necessary.

On the one hand, there are significant revenues that are still uncertain, such as the R$34.5 billion expected from the renegotiation of railway contracts.

But the Executive’s bet is that the resumption of investments will help reactivate the economy after the second half of 2023 of stagnation. If this happens, it could help with fundraising and reduce any need to contingency expenses or change the goal.

Another measure that could help is the creation of a limit on the use of judicial credits by companies to reduce taxes. Preliminary values ​​mentioned behind the scenes range from R$20 billion to R$60 billion, but the numbers are still being refined by the technical team.

Therefore, the first bimonthly report, scheduled for March 22, is considered an important trend signal for the following months.