Lula should end his term with four years of deficit - 09/28/2024 - Market

President Luiz Inácio Lula da Silva (PT) is expected to end the government with an effective fiscal deficit in the four years of his third term as Presidency of the Republic.

This is what the most recent official data released in the 2025 Budget proposal and in the fourth revenue and expenditure assessment report of this year’s Budget indicate.

The two official documents gave an overview of what to expect for the government’s accounts until the end of 2024 and in the second half of the Lula 3 government.

Even if the president meets the fiscal targets established for 2024 (0%), 2025 (0%) and 2026 (surplus of 0.25%), the scenario is of effective deficits (without discounts) until the end of his term. Experts call it a full fiscal result.

THE Sheet heard two experts in public accounts. Mansueto Almeida and Felipe Salto are categorical in predicting four years of deficits under Lula’s government.

The reason is the use of a tolerance margin in the fiscal framework and the impact of expenses with court orders (judicial sentences) and extraordinary credits that are outside the calculation of the fiscal target.

In 2025, there will be R$44.1 billion in court-ordered expenses not included in the fiscal target. For 2026, the estimated value is R$55.7 billion. All of these exceptions to the rule allow the government to meet the fiscal target, even with consecutive deficits.

For 2024, the government itself predicts a deficit of R$68.8 billion, with R$40.5 billion outside the fiscal rules in 2024. In 2025, the projection is for an effective deficit of R$40.4 billion in contrast to a surplus of R$3.7 billion with target discounts.

Furthermore, the government adopted a strategy of gradual adjustment of public accounts focusing on the rule’s lower margin floor, which allows for a deficit of up to R$28.8 billion this year. This tolerance margin is estimated at R$31 billion in 2025 and R$32.9 billion in 2026.

“In the government’s own presentations, when all expenditure is included, there is a deficit. This is the number that matters for public debt”, says Mansueto, chief economist at BTG and former secretary of the National Treasury.

Mansueto’s team at BTG projects an effective deficit of R$47.65 billion this year and R$109.73 billion in 2025. “In 2026, it’s a deficit,” he says.

The former Treasury secretary highlights the more challenging scenario with the interest rate increase cycle, which worsened public debt growth projections. BTG estimates indicate that gross debt will exceed the 80% level by 2025, closing the year at 81.58% of GDP (Gross Domestic Product).

“We are going to have a primary deficit every year of this government and, then, the nominal deficit projection will be around 6% of GDP. It is a level of countries that are pulling their hair out to make some fiscal adjustment”, he states when citing the France. The nominal deficit calculates the difference between public revenue and expenditure, including debt interest.

In his assessment, for Brazil to aim to regain investment grade by risk rating agencies, it will be necessary to answer the question: when is it expected to have a surplus sufficient to stabilize the debt and put it on a downward path?

“Today, we are unable to answer this question, because for the fiscal framework to remain in place, as a Treasury report showed, it will have to change the link between health and education or change some rules for the growth of mandatory expenditure”, he says.

According to Mansueto, even with GDP growth of around 2%, the growth of public debt does not stabilize and, with higher interest rates, the debt grows faster. Mansueto remembers that this is a different scenario from when Brazil received, in 2008, investment grade by the risk rating agency S&P.

At that time, there was a strong sequence of debt decline because the government generated high surpluses, which put the debt on a downward trajectory for several years.

Former Finance Secretary of São Paulo, Felipe Salto says that the government is not delivering the promised goal of zero deficit. “They [a equipe econômica] they had promised a recovery in the result, so that they would reach a positive primary between 2025 and 2026. That won’t happen”, says Salto, chief economist at Warren Investimentos.

The Warren team projects a full deficit (without discounts) of R$69.2 billion (2024); R$108.7 billion (2025) and R$122.4 billion (2026). Salto predicts that the government will change the fiscal target starting next year. According to them, public accounts will only be in the black in 2031.

“In our calculation, there needs to be a surplus of 1.5% of GDP for the debt to stabilize. And what is happening here? They are creating subterfuges, reducing the precatório, and using this lower band as if the band were the target” , criticizes.

THE Sheetthe Secretary of the National Treasury, Rogério Ceron, says he believes in achieving an effective surplus in 2026 during the Lula government.

“Our job is to show that the country is doing very well, we are in a sensational moment for the country, the country is growing well and with the unemployment rate at historic lows. We are recovering fiscally, we need to follow this trajectory”, assesses Ceron.

Salto recalls that the TCU (Federal Audit Court) has already drawn the government’s attention not to aim for the lower band of the target.

For him, the argument from the economic area that the problem of court orders was created during the Bolsonaro government and that the STF (Supreme Federal Court) decided that it would be outside the fiscal rules is not valid.

Salto claims that the government could have saved money to pay the court orders. “It’s a problem that they had to solve within the Budget’s possibilities. They can save elsewhere so that the target is preserved”, he says.

In the first year of the Lula government, the accounts had a deficit of R$264.5 billion in 2023, according to the final result calculated by the Central Bank. The negative balance was influenced by the regularization of court orders. At the end of last year, the Lula government obtained authorization from the STF to settle liabilities of R$92.4 billion.

In the 2025 budget proposal, the government states that the program planned for 2026 presupposes sufficient revenue to reach the target of a surplus of 0.25% of GDP, including measures and actions under study with the potential to increase revenue yet to be presented. .

With deficits in President Lula’s four years in office, Warren’s chief economist assesses that the Lula government is missing the opportunity to quickly lower interest rates by showing that fiscal responsibility is not a top priority.