People from the Lula government are still trying to sabotage Haddad – 08/29/2023 – Vinicius Torres Freire

Senior people in the Lula government want to change the primary balance target in 2024. Fernando Haddad promised zero primary deficit. That is, income and expenses (aside from those with interest) would be equal. That’s what should be in the 2024 Budget law, to be released on Thursday (31).

However, the possibility that the change will occur between now and next year will haunt the government’s accounts. The greater the abandonment, the greater the effect on interest rates, the dollar, etc. It’s trouble.

Various ministers, including those from the Planalto, want the government to allow itself a deficit of something between 0.5% and 0.75% of GDP (between R$58 billion and R$86 billion). In summary, the government and PT want to avoid spending cutbacks (“contingencies”), which would result in cuts in funds for the “New Pac”.

This conversation has been rolling through Congress since the beginning of the month. This week, it overflowed. The people at the Farm say it’s “friendly fire, the big ones”. The rest of the government generally kept quiet.

When consulted, Minister Simone Tebet (Planning) asked to tell this journalist that she is against the change: “Suggesting a change in the fiscal target with the necessary revenues under discussion in the National Congress and, even at the last minute, would go against the very logic of planning budget”.

As everyone expects some deficit in 2024, it would be better to recognize that the zero deficit goes to vinegar, say Lula’s advisers in the internal and, in public, the PT.

What’s the difference between trying zero deficit and failing and throwing in the towel right away?

First: throwing in the towel, it is certain that there will be at least a deficit in the new predicted size (and from there upwards). Trying to increase revenues and containing spending, it is more likely that the deficit will be smaller than expected in case of easing.

Second: if the government fails to meet the primary balance target, there would be “penalties”: prohibition of certain spending increases in subsequent years. In other words, throwing in the towel, the Lula government’s “fiscal framework” won’t be worth much.

To reach zero deficit, it is estimated that government revenue will have to increase by some R$130 billion (1.1% of GDP forecast by the government for 2024).

For such an increase, the government needs to win lawsuits in the “Revenue Court” (Carf) and, for that, change the law (to have a tie-breaking vote) and still manage to take the money from the victories. It also needs to tax the rich (in exclusive funds and abroad, among other attempts) or collect the money that companies failed to pay the federal government due to ICMS exemptions (state). Etc. A lot depends on Congress. Even if everything works out, the collection is actually a bit unpredictable.

To make matters worse, government revenue began to decline in June (in annual and real terms). It drops in particular because of revenues derived from natural resources (oil, etc.), dividends from state-owned companies, concessions —people in government and state-owned companies want to further reduce this source of revenue (“to invest more”).

In June, net government revenue was at 17.9% of GDP. To reach the zero deficit target, they would need to be around 18.7% and 19% of GDP, according to the Treasury staff.

The PT command and Planalto ministers believe, as usual, that it is necessary to preserve the PAC in order to “stimulate growth”, even with an increase in the deficit, in the current bad situation of large and growing debt.

It’s not that simple. The growing deficit and debt in Brazil and high interest rates in the rich world will for a long time be an obstacle to a greater reduction in interest rates, the very short-term Selic, and the others. The demoralization of the spending and debt plan would degrade economic expectations. People are playing with fire.

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