Society’s challenges and fiscal rule – 03/25/2023 – Samuel Pessôa

Since 2014 we have lived under an open distributive conflict. That is, the National Congress (CN), led by the President of the Republic (PR) —in our coalition presidentialism, in these matters, it is the CN that has the last word—, established rights to individuals and companies over State revenues and tax bases that do not talk to each other.

The expression, in public sector accounts, of this inconsistency is the structural fiscal deficit: under normal operating conditions, the Brazilian State collects less than it spends, and structurally the public debt is explosive.

It is worth insisting: this is a problem for the NC and, ultimately, for society. PR may benefit indirectly from a more definitive solution to our open distributional conflict, as this would improve expectations, reduce risk and, consequently, promote a more constructive environment for investment and economic growth.

According to calculations by my FGV colleague Ibre Bráulio Borges, based on data from the ANP (National Petroleum Agency), revenue from the mineral extractive sector for the Union, which was 0.9% of GDP from 2010 to 2019, will be, from 2023 to 2031, around 2.5% of GDP, an increase of 1.6 percentage points (pp) per year. The gain in revenue from the mineral extraction sector will essentially come from raising production from 3.5 million barrels per day to 6 million by the end of the decade, according to ANP projections.

Given the behavior of other public sector revenue sources, which essentially accompany the economy, and including the additional annual gain of 1.6 pp from the mineral extractive sector, net tax revenue for the Union will be around 18 .5% of GDP. This is the starting point for the new tax rule.

Spending in 2023 will be around 19% of GDP. It seems that the Brazilian political economy cannot live with lower spending. Paulo Guedes brought public spending in 2021 and 2022 to 18.1% of GDP and there was brutal public outcry and cursed inheritance speech in the tax area. Thus, the starting point will be an expenditure of 19% of GDP.

For the public debt not to have an explosive trajectory, we will have to have a primary surplus of 1.5% of GDP, which is already quite optimistic. Given that the starting point is a structural deficit of 0.5%, today we have a fiscal hole of 2% of GDP or R$ 200 billion, approximately.

This is today, with some optimism, the size of our distributional conflict.

In the press, it came out that Haddad intends to solve the problem by slowly reducing spending to 19% of GDP. Over the next few years, spending would grow at a slower rate than GDP for two reasons. First, GDP inflation has over the last two decades been consistently higher than consumer inflation by approximately 0.9 percentage points. Second, real spending deflated by the IPCA would grow at the speed of population growth, 0.5 percentage points less than real GDP growth.

The difficulty is that, with these parameters, we will have a surplus of 1.5% of GDP —which is what is needed to stabilize the public debt (with some optimism, it is worth remembering)— in 2031 alone. .

For the fiscal rule to be able to stabilize the public debt, society will have to hand over to the Brazilian State at least 1% of GDP revenue, or R$ 100 billion. And this revenue gain needs to come clean to compose the primary surplus. That is, the revenue gain cannot be shared with states and municipalities, nor be linked to other public budget lines, such as health, education or assistance.

This is the size of the challenge that, as a society, we have ahead of us.

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