Market expects only half of the revenue needed to eliminate the deficit in 2024 – 10/16/2023 – Market

Although the financial market views Luiz Inácio Lula da Silva’s (PT) government’s plan to rebalance public accounts next year with more optimism, analysts trust only half of the revenues needed to bring the deficit to zero in 2024.

In a questionnaire sent to the market before the last Copom (Monetary Policy Committee) meeting in September, economists said they had incorporated R$80 billion related to economic measures presented by Minister Fernando Haddad (Finance) to restore revenue in revenue projections net income of the central government –which comprises the National Treasury, the Central Bank and Social Security–, for 2024.

The predicted amount refers to the median of analyst projections. In total, there were 88 responses to this item, which makes up a broader set of information received from the market that supports the committee’s decision on the basic interest rate (Selic).

The questionnaire is sent to economic agents on the penultimate Friday before the BC collegiate meeting, and responses are received by the monetary authority by the following week.

The R$80 billion is less than the extra R$168.5 billion foreseen by the government in the 2024 Budget proposal delivered at the end of August to the National Congress. The increase in revenue is necessary to fulfill the promise made by the economic team to reach zero deficit next year.

Of the total package of measures, around R$70 billion still need approval from the Legislature. The other R$98 billion has already been validated, but the estimates made by the Executive are viewed with skepticism by the financial market.

Despite economists’ distrust, the numbers show that optimism has been growing over the last few months.

In August, the median estimate was R$65 billion in extra revenue for next year, that is, R$15 billion less than the economists’ projection in the most recent consultation carried out by the BC.

In data from June, when the question first appeared in the monetary authority’s questionnaire, the incorporated value related to government measures to restore revenue was R$60 billion for 2024.

“Consider in your answer the difference between your revenue projection for each year and the one you would project if no measure to restore revenue had been or will be taken, considering only the direct impact of the measures”, highlighted the BC in addition to the question in the research.

Luiz Fernando Figueiredo, former director of the BC and president of the board of directors of Jive Investments, is currently working with a projection of extra revenue of R$51 billion and says that a possible revision of the estimate will depend on the progress of economic agendas in Congress.

“The government will have partial victories and, as a result, will be able to improve revenue collection, but not enough to reach zero deficit”, he says. “It’s not impossible, but it’s very difficult, it would be a positive surprise.”

Of the R$ 97.9 billion expected by the Treasury with the recovery of credits in Carf (Administrative Council of Fiscal Resources), after the return of the so-called quality vote, the economist calculates R$ 22 billion in his revenue forecasts.

As for the taxation of exclusive funds, it estimates a revenue impact of R$7 billion, compared to the R$13.3 billion projected by the economic team. In the case of taxation of offshore companies, it considers R$4 billion in revenue from the R$7 billion in the government’s account.

“In the last month, skepticism has increased and not decreased, but it was already greater than it is today,” he said.

The improvement in market perception in recent months, according to Figueiredo, is due to deliveries made by the government that economists did not imagine would be possible. As an example, he cites the case of Carf, the approval of a more restrictive tax framework and the advancement of the Tax Reform process in the Legislature.

But he highlights that there are doubts that persist, considering the pace of some discussions in the Legislature. “Things end up being slower, the Tax Reform is a little behind the schedule we imagined”, he says.

In July, the president of the Senate, Rodrigo Pacheco (PSD-MG), stated that the text could be voted on in the House at the beginning of October. Last week, senator Eduardo Braga (MDB-AM), said that he will present the Tax Reform report on October 24th for consideration in November.

Amid this broad agenda proposed by the economic team, Santander estimates an increase of R$60 billion in net revenue in 2024 with the measures adopted by the government. There was an upward revision of its projection, which in September was R$50 billion.

In the questionnaire sent to the BC before the last Copom meeting, the bank disregarded fuel taxes in the calculation, which would represent an increase of R$26 billion in the institution’s account and would equate the estimate to the market median.

According to Ítalo Franca, economist at Santander, changes in the proposals presented by the government throughout the process in the Legislature, the possibility of judicialization and possible effects on investor behavior are elements that bring uncertainty in defining the final number.

For him, there will be more clarity regarding the feasibility of achieving the zero deficit target next year when the Budget for 2024 has been approved by Congress and some measures are already being implemented.

“Some matters are being debated a little more initially. These leave a little more skepticism. Others, such as offshores and exclusive funds, are already given a greater probability of moving forward. The agenda is advancing and, the more it advances, it could bring a little more optimism. Today there is a certain caution to include the full impact because we need to see [o plano] materialize”, he states.