The government’s creativity with the concept of surplus – 01/13/2024 – Marcos Lisboa

The evolution of public debt may seem like an arcane topic to the majority of the population, but it affects their daily lives. If government debt consistently grows more than the country’s income, the result will be higher inflation or more taxes. There is another option, default. The government simply fails to pay what it owes within the scheduled period.

This has been a frequent habit in Brazil. The PEC dos Precatório imposed the postponement of payment of the Union’s debts to citizens whose rights were recognized by the Judiciary.

Last month, the government issued a provisional measure that postpones the reimbursement of taxpayers who, according to a court decision, paid more taxes than they should have. “You see, I owe you guys. I just can’t pay you now. So I decided to pay you back later.”

Inflation implies loss of income power. What you could buy yesterday you can no longer buy today.

Insecurity about tax rules harms investment and job creation. If the rules can change arbitrarily, how can you estimate the return on investment? Better to allocate resources to another country.

Therefore, the importance of the primary surplus, which should indicate how much the difference between government revenues and expenses impacts public debt, in the present and in the future.

In this way, an important part of the evolution of public debt and the possible need for new taxes, the risk of inflation or the possibility of new defaults can be estimated.

However, recent decisions, both by the Executive and the Judiciary, have made it difficult to use the primary surplus to help predict the evolution of public debt.

In Brazil, the vast majority of public expenditure is mandatory. To make matters worse, once revenues increase, expenses with salaries, pensions and benefits are also readjusted, by legal determination or political decision. And then they cannot be reduced.

As the vast majority of expenses are permanent, the relevant primary surplus for evaluating the evolution of public debt is the “recurrent” one, which excludes extraordinary expenses and revenues, those that occur occasionally, but that will not be repeated in the following years.

The government, however, announces collection targets inflated by extraordinary revenues, such as those resulting from decisions by Carf, the administrative court that judges disputes over many years between the tax authorities and taxpayers.

This court announces ambitious targets for fines and revenue. These are, however, extraordinary revenues, referring to old disputes between the Revenue and companies.

The problem is that these extraordinary revenues enable permanent expenses, which will be repeated in the following years. How will they be funded going forward?

This is not the only gambiarra. In 2023, for example, the Executive Branch counted as revenue R$26 billion from PIS/Pasep which, according to accounting rules, should be used to reduce public debt. These extraordinary resources could not be used to calculate the primary surplus.

In December, it was identified that the resources from judicial deposits at the CEF, R$12 billion, should be recorded as Treasury revenue. This is, once again, an extraordinary recipe.

The primary surplus target for 2023 was lost. The government had announced a 0.5% deficit, but the number should exceed 1.1% (2%, if court orders are incorporated). It was then decided that this revenue should only be recorded in 2024. At the same time, the government brought forward expenses from 2024 to last year, as in the case of expenses with court orders.

With these tricks, an attempt is made to make this year’s primary surplus target more feasible, filled with extraordinary revenues and alleviated by anticipated expenses. He promises an evolution of public debt that will not occur in the coming years. Expenses will increase permanently, but the same will not happen with revenue.

To complicate matters, something similar happens with benefits for interest groups: once privileges are granted, the government has immense difficulty in reducing them. A recent example is the payroll tax exemption, introduced by the Dilma government and which the Lula government is trying to revoke.

The government that promises to combat tax benefits changes its discourse and reinvents them at the end of the year, as happened in the case of the automobile industry. If the privileges obtained by aviation companies in the tax reform were not enough, they will now be able to receive subsidies to offer cheaper tickets to retirees and students.

There are proposals to create funds to finance selected groups with public resources, such as scholarships for high school students, which will be carried out outside the budget.

Creativity also involves granting guarantees for new debts owed by local governments, the bill for which must be paid by the Union, as happens repeatedly. Or does anyone imagine that Rio de Janeiro and Minas Gerais will fully pay their debts to the Union? This increases public debt without having an impact on the current primary result.

The increase in resource transfers to municipalities, during the pandemic, allowed an increase in expenses with civil servants and retirees. Now, that the money has run out, they have piggybacked on the bill that exempts the payroll to contribute less to Social Security. A permanent loss of income.

The Judiciary decided that additional expenses with court orders should be excluded from the primary surplus account. However, effective spending will increase, as will public debt.

A decade ago, the country paid the price for creativity in public accounts, which recorded non-existent solvency. It is important to prevent this risk from occurring again.

The accounting of government accounts should make clear the expected evolution of public debt. But the economic team seems to opt for creative solutions in public accounts.

The alternative would be to make tables and data on public revenue and expenditure available, separating what is recurring from what is temporary, and the possible risks of new expenses, such as having to bear the unpaid debts of local governments.

Apparently, however, transparency is not the current government’s option.