ICMS will recover, says SP Finance Secretary – 12/18/2023 – Market

ICMS collection in the state of São Paulo is expected to grow again in 2024, according to the state’s Finance Secretary, Samuel Kinoshita, but with a modest performance, after having been at the lowest level in ten years in 2023 in comparison with the size of the São Paulo economy.

In an interview with SheetKinoshita spoke about the revenue and expenditure projections of the Budget for next year, approved last week by the Legislative Assembly, and also about the prospects for revenue from taxes and privatization operations, such as the sale of Sabesp, and a possible increase in ICMS.

Regarding expenses, the secretary said that no cuts are planned in the most sensitive areas of the São Paulo Budget, such as health, education and public security in 2024.

According to him, because of the new methodology for presenting the budget piece, which removes Social Security expenses from the secretariats’ budget, the amount allocated to each department next year shows a drop in relation to what was approved for 2023.

When considering last year’s expenditure excluding inactive people, however, the forecast is for an increase in spending in these areas.

In the case of the Department of Education, there was also a downward adjustment due to the new way of accounting for Fundeb (national fund for basic education), but without there being an actual cut in this budget, according to the secretary.

See the main excerpts from the interview.

Was there a cut in the Budget for 2024?
There were some very mistaken readings regarding the comparison between the piece approved for 2023 and the piece for 2024, saying that there was a decrease in the budget of departments such as Education, Health and Public Security.

In this comparison, it is important to note that we made two important adjustments, which are recommended in the manual made available by the National Treasury Secretariat and were also highlighted by the Court of Auditors.

At Fundeb, we changed this accounting this year. Another update is the SPPrev pension issue. Before, we did it within the Department of Education, Health, etc.’s own account. Now, there is a separate value for Social Security.

When we analyze these two years, given that there was this change in methodology, it needs to be done through an adjusted analysis, the LOA [Lei Orçamentária Anual] 2024 against the adjusted 2023.

There is an increase of 8%, based on the calculation we made here of the adjustment, at the Department of Education. In Health, 4%, Public Security, 9% [no gasto previsto para 2024].

Will there be an increase in ICMS?
São Paulo’s position is not to send the proposal to increase the modal rate now, at this time. The ICMS collection is not what we would like. We should have a little stronger revenue.

The present and the recent past contemplate the need for recomposition. This is not an increase in the tax burden.

If you take the ICMS burden on São Paulo’s GDP, 2023 is the lowest number in ten years. Therefore, a recomposition of the modal rate would not be an increase in the tax burden.

It would be a recomposition of the load in order to make it viable and easier to respond to the countless social demands that we have here in the state of São Paulo.

Will ICMS collection grow?
We have an ICMS projection that is not brilliant for the year 2024, of R$207 billion for next year. This is growth compared to this year. It grows back.

Regarding the ICMS issue, specifically for São Paulo, the current situation was negatively impacted by three factors. Firstly, complementary laws 192 and 194.

This was part of a debate between finance secretaries, the Union, and resulted in an agreement before the Federal Supreme Court and a new type of fuel taxation. In fact, there is a loss of revenue due to the specific issue of fuel.

The second factor is a decrease in the fraction of the economy linked to industry. This happened in the United States, São Paulo and other Western countries. São Paulo also had an additional loss.

We went through a deindustrialization process that was perhaps a little faster than you would recommend looking at the big numbers for the state.

More recently, we went through a process of very important price deflation on products that we tax with ICMS. When you have this phenomenon of lower prices, you also have lower-than-expected revenue.

What is the expected revenue from the privatization of Sabesp?
This is part of a set of revenues, which is R$10.7 billion. This is a set of asset disposals that we expect to be carried out in 2024.

We also considered Sabesp within this. There is no specific allocation for Sabesp. Let’s wait for market expectations and implementation.

The secretaries who are closest to this issue will prepare the specific format of the model, what fraction will remain for the government, and how much will go to follow-on.

The model definition is still open. So there is a certain uncertainty related to this.

Does São Paulo foresee a challenging year for Budget management?
There is a challenge in relation to 2024. Our main source of revenue, which is ICMS, is going through a more challenging time. In addition to the issue of our main tax, we have an international political, geopolitical and monetary scenario that gives a somewhat uncertain perspective.

São Paulo also has the traditional constraints of a Brazilian budget process, a lot of linking, a lot of indexing.

When we see a budget of R$328 billion, it is huge, but what is available, which you have the capacity to manage, is a much more restricted fraction.

What we have is very similar to what happens in the Union. The fraction you actually manage the Budget is less than 10%.

Are there any concerns regarding the debt with the Union?
We have a very high debt service in São Paulo, due to having a significant inventory. Furthermore, there is a discussion regarding what is correct from the point of view of this debt.

The states of the South and Southeast presented a proposal that was led by the Finance Department of Rio Grande do Sul. The proposal they prepared and was endorsed by the governors of Cosud [Consórcio de Integração Sul e Sudeste] it is a review of the parameters contained in the debt with the Union.

Will São Paulo have difficulty servicing the debt? No, because he does a good job, but what is correct, what is fairest, is up for debate.

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Samuel Kinoshita, 43
Secretary of Finance and Planning of the state of São Paulo. Graduated in economics from Insper, he has a master’s degree in economics from Universitat Pompeu Fabra and a master’s degree in statistics from Columbia University. He was special advisor to the Ministry of Economy from 2019 to 2021