Monitoring of fiscal policy – 11/25/2023 – Samuel Pessôa

Last week, the Treasury Secretary presented the fifth reassessment of the 2023 fiscal execution. The numbers have gotten much worse. According to data presented by the secretary, primary expenditure will be 19.4% of GDP (Gross Domestic Product), and net revenue will be 17.7%. In other words, the primary deficit will be 1.7% of GDP, or R$177 billion.

Given that we are in the first year of government and given that spending has increased a lot — from 17.9% of GDP in 2022 to 19.4% —, the government will most likely not be able to execute everything. Spending should be R$37 billion less, according to the Treasury Secretary. Thus, the Union’s primary deficit will be 1.3% of GDP.

The numbers for 2022 were 17.9% of GDP in expenditure and 18.7% of GDP in revenue, which resulted in a surplus of 0.8% of GDP. Spending in 2023 will be 1.1% of GDP higher (already considering that spending will be lower), revenue will be 1% of GDP worse, and, therefore, the surplus will be worse by 2.2 percentage points of GDP.

The increase in public spending was a political decision taken at the end of last year after the election of President Lula and was made possible by the approval in the National Congress of the constitutional transition amendment. There was an understanding that Paulo Guedes had greatly contained public spending and that numerous areas of the public sector were underfunded.

To find out the determinants of the drop in revenue, I will consider the data accumulated up to September in comparison with the data accumulated up to September 2022, all at prices from September 2023, deflated by the IPCA (Broad Consumer Price Index). Most of the drop in revenue —¾, or 0.75% of GDP— occurred due to the decline in revenue not administered by the SRF (Federal Revenue Secretariat). There were significant drops in concession revenues and dividends from state-owned companies.

How much this result already expresses a new PT governance that encourages concessions less and prioritizes increasing investment by state-owned companies and, therefore, distributes less dividends is difficult to know looking at just one year of government.

For revenue administered by the SRF, there was an increase of 0.5% of GDP in Income Tax withheld at source added to Social Security collections. As the minister has warned, there is a significant drop in the collection of Corporate Income Tax and Social Contribution on Net Profit, of 0.4% of GDP. This is due to the growth pattern of 2023 over 2022, largely based on agriculture, which pays little tax.

It may also be the result of the reduction in the IRPJ and CSLL calculation base due to the ICMS incentives that state governments grant (I covered this topic in a column in October). However, this effect should be smaller, as the complementary law that greatly increased the space for this compensation is from 2017.

The high deficit for 2023 was contracted with the Transition PEC. We have to remember that it was enthusiastically supported by the entire society, in addition to being approved by the National Congress.

The Minister of Finance, Fernando Haddad (PT), has done what he can to try to plug the fiscal hole. I think that Congress needs to be in solidarity with the minister and not overturn the President of the Republic’s veto on payroll deductions. This is a public policy that does not survive any cost and benefit analysis.

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