Lula government chooses to increase spending and taxes; cut expenses, no

Even though it needs R$168 billion to meet the goals of the fiscal framework and eliminate the deficit in public accounts in 2024, the government of President Luiz Inácio Lula da Silva (PT) resists cutting spending and rationalizing expenses. The movement is actually reversed.

Demonstrating from the outset that balancing the accounts is not a priority, the new government managed, even before taking office, an increase of R$145 billion in spending for this year, through the proposed amendment to the Constitution (PEC) of the Transition – the ceiling-breaking PEC.

“From the beginning, the government made the political choice to spend more, increasing its ceiling by 2% of GDP”, explains Gabriel Barros, partner and chief economist at Ryo Asset.

To cover expenses and replace the spending ceiling rule, which balanced the Budget since the Michel Temer (MDB) administration, the PT government managed to approve in Congress a fiscal framework focusing only on increasing revenues through taxation to close the accounts. As if that weren’t enough, the text also determines a real increase in expenses of at least 0.6% per year, regardless of revenue.

Since the beginning of the year, Minister Fernando Haddad, of Finance, has faced a crusade with the Legislature to approve projects aimed at raising more. Some measures have already been approved, others are awaiting voting or adjustments. These include taxation of electronic games, income abroad (offshores) and closed-end funds. Later, the government will try to resume taxation of profits and dividends in the second phase of the tax reform.

Even with all the initiatives, observers of the fiscal scene doubt that the target of zero deficit in 2024 will be met. According to Barros, the revenue projections that the government put in the Budget are overestimated.

Among the biggest disparities are the expectations of revenue from the reestablishment of Carf’s deciding vote in favor of the government in tax disputes. The government foresees an increase of R$50 billion with the measure; Ryo Asset, worth R$10 billion.

Another example is the new taxation system for Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) calculations, published by provisional measure. The Budget’s revenue forecast is R$90 billion; for Ryo Asset, it will not exceed R$20 billion.

The company’s expectation is for a primary deficit equivalent to 0.7% of GDP next year, similar to the median market projections (0.71%).

For economic consultant Zeina Latif, the market never “bought” the goal of zero deficit in 2024 and this is already being priced in. On the other hand, there was relief that Haddad had maintained his goal. “At least he hasn’t thrown in the towel yet,” she says. She notes that Haddad is still viewed with condescension by the market, which believes that dialogue could be more difficult with members on the left of the PT.

Lira criticizes taxation agenda and presses for administrative reform

The lack of confidence in meeting the fiscal target and the long sequence of revenue measures have increased pressure on the government to review expenses.

The main ones came from the president of the Chamber of Deputies, Arthur Lira (PP-AL), who has publicly spoken out against tax increase initiatives proposed by Haddad.

Lira brought up the need for administrative reform to face criticism that the Executive and Congress only have projects to collect and spend.

He recalled that the Chamber has a PEC – 32/2020, presented by former Economy Minister Paulo Guedes – to promote such reform, but that it will not go to plenary due to lack of support from the government. Reported by deputy Arthur Maia (União -BA), the proposal was approved by a special committee of the Chamber in September 2021, but has been in the House’s drawer since then.

The idea of ​​reform gained support from parliamentary groups and sectoral entities. The initiative is considered another form of demonstration of power by the President of the Chamber, amid negotiations on ministerial reform to form a parliamentary base for the government.

Regardless of Lira’s objective, the idea is viewed favorably by the market. Latif believes that, just as the Social Security and tax reforms were able to be tailored and ended up being approved, the time is right to start a discussion on the topic.

The chances of it coming to fruition, however, are remote, the economist believes. “An adjustment on the expenditure side, especially in the public sector, is not in the DNA of this government,” she says.

Government does not want reform and defends specific changes

The PT, historically aligned with civil servant corporatism, rejects the administrative reform proposal in Congress. The government was forced to discuss alternatives, amid continued pressure from Lira, but statements from ministers indicate that the Executive will defend, at most, specific changes to the legislation.

The Minister of Management and Innovation, Esther Dweck, has argued that civil service rules need adjustment, but does not support the end of civil service stability. One of the proposals under discussion is a “sliced” package of measures involving the public sector, without presenting a constitutional amendment.

After a meeting of ministers on Tuesday (5) to discuss ways of responding to the demand for rationalization of the State, the minister classified PEC 32 as “very bad”. When questioned, Haddad also declined to commit to the administrative reform.

According to him, the government is studying ways of “modernizing the State”, defending improvements in the rules for public competitions and also the approval of the bill to limit “super salaries” in the public service, stuck in the Senate since 2021, after pressure from the Judiciary. “We have managed to move forward with many issues, we can do so with the project too,” Haddad told reporters.

Administrative reform can generate savings of R$ 180 billion in ten years

For Barros, despite internal resistance, there is a chance that the administrative reform will prosper, with Congress taking responsibility for itself. He sees the moment as ideal, due to the need to renew the public sector’s staff.

According to a study by Ryo Asset, with a conservative version of the reform that only affected future employees, the savings to public coffers could be up to R$180 billion over the next ten years.

“It’s a volume that starts small and gains strength each year, with the retirement of current employees”, he explains. Barros says that the government should take advantage of the next competitions to establish the new rule. “If it doesn’t change now, the current expense will be extended for another 40 years”, he warns.

Before the reform, priority should be rationalization of expenses, says economist

For Bruno Carazza, economist and associate professor at Fundação Dom Cabral, the reform is not a “silver bullet” for settling accounts and its most significant results are in the long term. The government’s priority, according to him, should be to review expenses that can alleviate bills in the short term. “It is necessary to go over the spending structure with a fine-tooth comb to reevaluate public policies”, he argues.

Carazza believes that several programs that do not produce the expected results could be terminated, merged or remodeled. “The review should cover everything from income transfer programs to spending on parliamentary amendments, which are distributed to states and municipalities without effective monitoring of the results of public policies,” she says.

A special secretariat was formed within the Ministry of Planning for this function, but the work has not progressed. Minister Simone Tebet had her role reduced, with public loss of power, as in the case of the appointment of the new president of IBGE, Márcio Pochmann, by President Lula.

For Carraza, the secretariat has good experts in the quality of public spending and knows what needs to be done. “But this is of no use if the president does not have the political will to rationalize spending and adjust public accounts”, she concludes.

Fiscal adjustment based only on collection is a mistake, says economist

The current government’s decision to make a fiscal adjustment based only on increasing revenue and not controlling expenses is a mistaken premise, in the opinion of Barros, from Ryo Asset.

According to the economist, international academic literature shows that countries that made revenue adjustments had worse macroeconomic results than economies that combined revenue adjustment measures and expense cuts.

He cites a study published in Journal of Economics Perspectives, entitled “Effects of Austerity: Expenditure and Tax-Based Approaches”, which shows the undesirable consequences of the single revenue strategy on inflation, interest rates and GDP growth. “Revenue is not fully predictable, which creates uncertainty and changes future market expectations”, he explains.

The market estimates that at some point Minister Fernando Haddad will be forced to review the target of the fiscal framework, which could affect the Central Bank’s interest rate trajectory.

For Barros, this should happen from December, when new tax projects to increase revenue have already been approved by Congress.

At this time, the external scenario and the prospects for an American recession will also be defined, which could affect world markets. “If reality shows the impossibility of meeting the target, some concrete measure will have to be taken in relation to cost containment”, predicts the economist.

For economic consultant Zeina Latif, it is difficult to establish a deadline for reviewing the target. She believes that depending on numerous factors, domestic and external, the bill could be left for the next government. “For now, the possibility of cutting spending is more rhetorical. This government will only make the adjustment if forced by circumstances”, she believes.