Precatories can generate a tax bomb of R$ 200 billion in 2027 – 07/14/2023 – Market

The postponement of the Union’s judicial debts, approved in 2021 through the PEC (proposed amendment to the Constitution) of the Precatorios, could generate a tax bomb of up to R$ 199.9 billion to be paid in 2027, warns the National Treasury.

The blow to the accounts is so great that the agency itself assumes that “there will be future exceptionalization of this expense from the spending limit from 2027”. In practice, the Treasury suggests excluding precatories from the new fiscal framework, which would require the approval of a new amendment to the Constitution.

Without changes, the problem will appear in 2026, an election year, when the government of Luiz Inácio Lula da Silva (PT) has to present its Budget proposal for the following year, indicating how this bill will be paid.

“If there is no change in the current rules, the payment of this liability should again be subject to the expenditure limit, compressing the space for the execution of discretionary expenses”, says the Treasury in the Fiscal Projection Report for the 1st half of 2023.

The PEC of Precatorios approved in 2021 was the way out tailored by the government of Jair Bolsonaro (PL) to honor social security benefits, irrigate parliamentary amendments and expand social spending in 2022, an election year, without bumping into the spending ceiling locks — fiscal rule which limits the growth of expenses to inflation and which was changed successively in the past administration.

One of the central measures of the proposal was the payment of precatorios in installments, made possible through the creation of an annual limit for the payment of these debts, valid until 2026. The excess amount would be postponed to the following year, creating a kind of queue of these titles.

At the time of the proposal, the then Minister Paulo Guedes (Economy) said that the government needed to defend itself from the “meteor” of R$ 89 billion in precatories planned for 2022, which threatened the continuity of public policies. The invoice for these debts almost doubled compared to 2021.

Experts outside the government were adamant when classifying the initiative as “PEC do Calote”, given that the amounts owed are uncontroversial, that is, the federal government is only responsible for paying them as determined by the judicial authorities.

In 2022, the first year the rule was in force, the government postponed BRL 21.9 billion in unpaid legal debts, and Treasury estimates indicate the risk of this becoming a snowball.

The government’s bet to avoid this outcome was the so-called meeting of accounts, in which the Union’s creditors could use precatorios as a kind of bargaining chip to reduce tax debts or bid in concession or privatization auctions.

The modalities of agreement were foreseen in the constitutional amendment, but did not take off amid the legal uncertainty alleged by the Lula government to accept these credits. The use of precatories in concessions, for example, was suspended by the AGU (Advocacy-General of the Union), which recommended that federal public administration bodies await the pacification of the issue.

With no concrete signs of progress in the negotiations, the Treasury’s estimate of the size of the precatorios skeleton disregards options for reducing liabilities, such as settlement of accounts or early payment agreements with a 40% discount.

This is a sign of caution or even skepticism about the possibility that these instruments could help solve the problem. The agency’s previous report assumed that, between 2023 and 2026, 18% of this inventory would be paid for by agreement with discounts and 23% would be used to settle debts or grants.

In the Treasury’s projections, the settlement of liabilities through payment to creditors should cause a significant impact on the accounts. The bill is equivalent to 1.4% of GDP (Gross Domestic Product).

Even with a more benign fiscal trajectory, in which Minister Fernando Haddad (Finance) is successful in his plan to boost revenue, the discharge of precatories should cause a deficit of 1.1% of GDP in 2027. more pessimistic, without extra income, the gap could reach 2% of GDP.

One possibility would be to use any surplus in relation to the fiscal targets for the coming years to write off part of the liabilities, but this depends on a good performance of the government’s revenues.

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UNDERSTAND THE IMPASSE OF PRECATORIES

What did the PEC do Precatories?

• The proposal created an annual limit for the payment of judicial debts. As with the spending cap mechanism, the text is based on the value passed on to these judgments in 2016 and provides for its updating according to the inflation of the period. The excess amount is postponed for payment in the following year, forming a kind of debt queue.

When she went approved?

• In 2021, still in the Jair Bolsonaro (PL) government.

What motivated you to proposal?

• In 2021, the Bolsonaro government needed to submit the proposal for the 2022 Budget. The then president wanted to increase social spending in an election year, but a “meteor” of R$ 89 billion in judicial debts, as the then minister Paulo Guedes called it, occupied the space that was available in the Budget. The creation of the sublimit sought to release funds to meet Bolsonaro’s wishes.

How much does the rule apply? time?

• The first year of validity was 2022, when the government postponed BRL 21.9 billion in unpaid judicial debts. The constitutional amendment provides that the limit will be valid until the end of 2026.

What happens in 2027, when the term?

• The Treasury warns of the risk of a bomb of R$ 200 billion in precatories to be paid by the Union in 2027. To face this expense, the agency’s suggestion is that the expense stay outside the limits of the new fiscal framework.