Tailor-made for Lula, the ceiling-breaking PEC accelerated government spending

After a period of slowdown, the pace of growth in public spending increased again this year.

In the second quarter, public administration consumption expenditure (in the sum of the Union, states and municipalities) increased 2.9% over the same period last year, according to IBGE. It was the biggest increase in this type of comparison since the beginning of 2022.

As a result, spending growth in 12 months, which had lost momentum since the second quarter of last year, rose again, as shown in the following table:

Public administration consumption expenditure (variation over 12 months). Source: IBGE

The increase in government spending is one of the factors behind the growth in Gross Domestic Product (GDP) in recent months.

Although the economy as a whole slowed down between the first and second quarter, with GDP growth at the margin (over the immediately previous quarter) falling from 1.8% to 0.9%, public spending gained speed, with a rate of expansion rising from 0.4% to 0.7% in the same comparison.

According to experts interviewed by People’s Gazette, this growth in government expenses can be attributed to the “PEC fura-ceto”, presented after the presidential elections and approved at the end of 2022 at the request of the elected government of Luiz Inácio Lula da Silva (PT). “It created incentives for more spending”, says the chief strategist at RB Investimentos, Gustavo Cruz.

The constitutional amendment, which PT members and allies called the “Transition PEC”, authorized additional expenses of almost R$170 billion beyond the spending ceiling, with the commitment to draft a new fiscal framework. It was sanctioned with vetoes by Lula on the 31st.

Among the expenses authorized by the PEC fura-ceto are the granting of a real adjustment for the minimum wage, which impacts Social Security, and for the Continuous Payment Benefit (BPC); increase in Bolsa Família and also in spending on health and education; plus a linear adjustment of 9% for federal public service salaries.

Increased spending makes it difficult to balance government accounts

Economist Rafael Perez, from Suno Research, points out that there is a trend towards an increase in public spending that creates problems in closing the government’s accounts.

The expectation is that, this year, there will be a primary deficit of 1% of GDP, according to the median of market projections. For 2024, when the target defined by the new framework is zero results (neither deficit nor surplus), expectations point to a negative balance again, of 0.8% of GDP.

This means that government spending, even without counting public debt service, will exceed revenues in both 2023 and 2024. New deficits, although slightly smaller, are also expected for 2025, 2026 and 2027.

It is worth highlighting that, in the last two years, the consolidated public sector – which includes, in addition to the federal government, state and municipal administrations and state-owned companies – recorded a primary surplus in the accounts. In other words, it raised more than it spent. In 2021, the account closed positive at 0.7% of GDP, according to the Central Bank. In 2022, the balance was 1.3% of GDP.

The scenario, however, changed in June this year, when the first accumulated deficit in 12 months since October 2021 was recorded.

The increase in spending contributes to putting pressure on public debt. After falling from a peak of 87.6% of GDP in November 2020, amid pandemic spending, to 72.9% of GDP at the end of 2022, debt rose again this year. In July, it was at 74.1%, and the market expectation is that it will continue to rise, reaching 75.9% of GDP by December, according to the median of projections collected by the BC’s Focus bulletin.

The government’s focus is on increasing revenue, without cutting spending

The problems tend to extend into the coming years, even with the limitation of real growth (above inflation) of federal public spending to 2.5% per year, as predicted by the fiscal framework.

Market expectations indicate that a stabilization in public debt will only occur around 2031 or 2032, at the level of 88% of GDP.

“The entry into force of the fiscal framework reduced the chances of an explosion in public debt, however, it is very dependent on revenue”, highlights Perez.

The Lula government’s hope to improve the public finances scenario does not involve cutting spending, but only through increases in revenue. “It was a common practice in other PT governments, such as Lula’s two previous terms and Dilma Rousseff’s,” says Cruz.

This strategy has obstacles. One of them is that the Legislature is not excited about discussing increases in the tax burden. It reached 33.7% of GDP last year, according to the National Treasury, the highest rate in the historical series starting in 2010.

The political consultancy Eurasia points out that two additional revenue proposals are more likely to pass muster in the Legislature. These are those that deal with the taxation of offshore funds (PL 4173), presented on August 29, and closed-end funds (MP 1184), which awaits the installation of the joint commission in Congress. Even so, the government will have to make some concessions.

Another government bet, the extinction of Income Tax deductions on Interest on Equity (JCP), runs the risk of being approved only next year, points out the consultancy. “An intermediate solution that restricts the scope of current deductions is the most likely”, highlight analysts Christopher Garman and Daniela Teles.

Assets in 2022, oil royalties and high inflation no longer help the government

Two trump cards that the government had in previous years to balance public accounts and even close them in the black are no longer available, at least in 2023. “Last year we benefited from oil royalties and high inflation, who ended up being friendly with the government”, says Warren Rena’s chief economist, Felipe Salto.

Another likely complication for the government next year will be not counting on more robust growth in the economy, which impacts revenue.

If, for this year, the median of Focus projections indicates GDP growth of close to 3%, projections for 2024 are for an expansion of just under 1.5%. “Revenues will not increase at the same pace [em 2024]”, says the Suno Research economist.