Market fails to give the new framework the benefit of the doubt, says Bráulio Borges – 04/21/2023 – Market

Ensure BRL 100 billion to BRL 150 billion in recurring revenues, every year. Without this, specialists in public accounts are unlikely to endorse the new fiscal rule of the government of Luiz Inácio Lula da Silva (PT), explains economist Bráulio Borges, specialist in public accounts

“The market may start to believe when the government delivers the measures it is promising to increase revenue — and not just any measure, but the most pulpy ones, which bring R$ 30 billion, R$ 50 billion”, he says.

This commitment became more pressing after the Ministry of Finance sent Congress a rule with looser collection mechanisms in the event of non-compliance with the goals it committed itself to, and also when it became clear that the initial effort did not guarantee a debt reduction in the current mandate.

“The goal, presented by the Treasury, to get out of a deficit of 0.5% of GDP [Produto Interno Bruto] this year for the surplus of 1.26% in 2026, it will not be in the supplementary bill. It will appear, every year, in the LDO [Lei de Diretrizes Orçamentárias]”, says Borges. “So, nothing guarantees this figure announced by Minister Haddad.” Read below the main excerpts from the interview that the economist gave to the Sheet.

Faria Lima, the avenue that serves as a nickname for the financial market as a whole, did not receive the details of the fiscal framework sent to Congress. But members of the government, especially the PT base, complain that the adjustment proposed by Finance Minister Fernando Haddad’s team is stronger than the spending ceiling. How is this possible? Let’s go back in time. The spending ceiling sought an improvement in the primary result of four percentage points of GDP in ten years, cutting spending. It would be a drop of 0.4% per year, on average.

The fiscal consolidation proposed by the Lula government starts from a primary deficit of -1% of GDP this year to reach a surplus of 1% in 2026. We are talking here about a fiscal consolidation of approximately two percentage points, 0.5% per year. But we know that much of this needs to be done with increased revenue. .

The ceiling proposed to bring spending from 19.9% ​​of GDP to close to 16% in ten years. The new rule, in four, seeks a stabilization of expenditure. It was 18.1% in 2022 and should remain at 18.9% this year. I simulated six different scenarios, with higher and lower GDP growth, with and without an increase in the tax burden. The expense would be between 18.2% and 18.8% in 2026.

The horizons are different, but the total consolidation presented back there by the ceiling was double the proposal in the current rule.

But in the case of the ceiling there was a trick in the beginning. The squeeze was not linear. Back in 2016, the projected deficit was revised much worse. This led to a higher-than-expected readjustment of expenditure, as the ceiling was the actual expenditure for 2016, corrected by the IPCA for the following years.

Despite being bold, the criticism that does not appear, and needs to be made, is that the ceiling did not deliver fiscal sustainability, understood as a stable and declining public debt, and proved, over time, unfeasible, but as the adjustment proposed by the ceiling it occurred on the expense side, not on the revenue side, as it is now, the market gave the benefit of the doubt.

From 2017 to 2019, the Brazilian public debt rose nine percentage points of GDP. The ceiling did not stabilize the debt in the initial years, quite the contrary.

Go back to 2019, before the pandemic, because the pandemic messed up a lot. At that point, the market consensus was that public debt would rise another four percentage points over the next four years. That is, there was no expectation that the ceiling would stabilize the debt before 2023 or 2024.

In 2019 it started to get a little more difficult to meet the ceiling, even with the pension reform. This is an important point. The idea was sold that the Social Security reform was one of the main measures for compliance with the ceiling, and it is not true. In 2019, an even more powerful reform than the one suggested before was approved, but even so, it was not enough.

Investment was being cut. Bolsa Família was frozen from 2015 to 2021. Servers are no longer readjusted. The minimum wage had no real gain.

In September 2019, Fabio Giambiagi and Guilherme Tinoco launched a proposal to revise the ceiling in 2023, under a new government, based on the simple finding that the original ceiling was unfeasible.

At the end of last year, showing this strangulation, the elected government managed to increase spending with the approval of a PEC (Proposal for Amendment to the Constitution). Does this also make it easier to adjust initially like it did with the roof? The PEC readjusted the expenditure by BRL 170 billion — in practice, it was BRL 145 billion, because around BRL 24 billion are funds from abandoned PIS accounts that the government wants to withdraw to finance investment works this year.

A large part of mandatory expenses with Bolsa Família were readjusted. This is another important question.

Between 2004 and 2020, Brazil spent about 0.4% of GDP per year on Bolsa Família. In 2021, it reached 1.1%. Now, with R$600 and additional benefits for children and young people, it goes to 1.5% of GDP from 2023 onwards. In other words, there was an increase of just over one percentage point of GDP in mandatory spending – and this would happen with Lula, Jair Bolsonaro, Simone Tebet or Ciro Gomes, as we saw in the electoral debate.

However, an increase in mandatory expenditure of this order of magnitude needs to be financed with fiscal sustainability. However, we know that it is almost impossible to do this with timely cuts of 1% of GDP in other expenses. Even more so when it is necessary to recompose public investment, spending on health and education, for example

In this case, the PEC made it difficult to meet fiscal targets. No wonder they need BRL 100 billion to BRL 150 billion in additional recurring revenue to deliver on targets. The PEC created the adjustment size that we are now talking about.

It’s almost the other way around, so does she make the new rule harder now? Yes. Hence all the fighting in an attempt to limit the size of the 2023 Budget adjustment right after the elections. There was a need for recomposition in several headings, but, on the other hand, fiscal sustainability demanded caution.

The crux of the whole discussion is public debt. There are many calculations —I did several myself— showing what the primary surplus is needed for us to stabilize the debt as a proportion of GDP.

This magic number depends on several factors, such as GDP growth and interest rates, for example. In my calculations, in a realistic scenario, we need a primary surplus [ter mais receitas que despesas] in the range of 1% to 1.5% of GDP to stabilize the debt and, later, eventually, generate its reduction in the future.

The new rule proposes a primary surplus of 1% of GDP by 2026 — the lower limit of that range I mentioned. This means that, until then, the debt grows.

But initially, the rule was still pleasing, but later, with the text of Congress, questions arose. What happened? The formal proposal has very weak enforcement.

What is weak enforcement? The imposition for the fulfillment of what is being promised.

The goal, presented by the Treasury, of moving from a deficit of 0.5% of GDP this year to a surplus of 1.26% in 2026, will not be included in the complementary bill. It will appear, every year, in the LDO [Lei de Diretrizes Orçamentária]. So, nothing guarantees that number announced by Haddad. It’s not locked.

The proposal is also changing some aspects of the LRF (Fiscal Responsibility Law), which weaken the commitment of the proposal. We include the story that the contingency is no longer mandatory, as provided for in the LRF, and becomes optional.

It is also in the LRF, but was removed from the bill to complement the Executive’s punishment for non-compliance with the target. .

What’s the problem with all this? As enforcement is weak, the attitude of economic agents is that seeing is believing. The government does not have the benefit of the doubt — and because it does not, it does not anticipate, via expectations, gains such as the improvement in the exchange rate.

What improves confidence? The market may start to believe when the government delivers the measures it is promising to increase revenue — and not just any measure, but the most pulpy ones, which bring BRL 30 billion, BRL 50 billion in recurring revenue.

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Braulio Borges, 42

Graduated in Economics and Master in Economic Theory from FEA-USP (Faculty of Economics, Administration, Accounting and Actuary of the University of São Paulo). He is a senior economist in the Macroeconomics area at LCA and, since 2015, a research associate at FGV Ibre (Brazilian Institute of Economics, of the Getulio Vargas Foundation)