The trend is for public accounts to worsen, says Itaú – 04/10/2024 – Market

Economists at Itaú Unibanco expect a fiscal deterioration in Brazil from 2025 onwards and say that the new framework does not bring enough credibility that it will organize public accounts in the long term.

At a breakfast with journalists this Wednesday (10) at the bank’s headquarters in São Paulo, Itaú’s chief economist, Mário Mesquita, acknowledged that Brazil’s recent fiscal performance is better than that of other emerging countries, as which is the only one with debt below the pandemic.

According to Mesquita, this positive fiscal performance is due to better-than-expected revenue this year, thanks to economic activity in the first quarter above expectations, more driven by domestic consumption. And it is also due to specific revenue measures implemented by the economic team last year.

But Itaú economists stated that the tendency is for Brazil to worsen its public accounts again. The analysis is that the extraordinary revenue seen in these first months of 2024 is short-term and will not be repeated in 2025, according to economist Pedro Schneider.

“The government is not showing the same appetite for new measures valid from next year, so we will have less extraordinary revenue. And, as we have seen, the effort to reduce spending is well contained. So, spending will not will fall and revenue will be lower than this year”, he says.

Mesquita recalls that, structurally, the country has difficulty containing expenses and that the current administration of Luiz Inácio Lula da Silva (PT), contrary to what it should be, is increasing expenses, even with the approval of the new fiscal framework, replacement for the 2016 Spending Ceiling.

For Schneider, the increase in government spending is one of the factors that lead to questions about the credibility of the fiscal framework. He added that the fact that the instrument was established through a complementary law, and not a constitutional law, creates doubts about its effectiveness in organizing public accounts, as it is easier to change its rules along the way.

Last Tuesday (9), the Chamber of Deputies approved a device that allows the government to bring forward the expansion of the 2024 spending limit and, in practice, release extra expenditure estimated at R$15.7 billion.

The change also helps the Executive to reverse the blockage of R$2.9 billion on funding and investment expenses announced in March, in addition to accommodating possible additional pressures for increased spending.

Schneider sees risks of more changes like these in the spending limit and scope of expenses included in the framework, which threatens the effectiveness of the instrument for controlling public accounts.

Itaú expects, for this year, a primary deficit of 0.7% of GDP (Gross Domestic Product), despite the government’s goal of bringing this fiscal deficit to zero. For 2025, the bank projects a new negative performance in the primary result, even worse, of 0.9% of GDP, even with the government promising to deliver a surplus.

Mesquita says that these expectations are reinforced by the fact that it is “very atypical” for the government to start adjusting public spending from now on, as it is unusual for this to happen in the second half of a presidential term, although he recognizes that it is not impossible.

“Public debt should continue to grow at a rate of 3 percentage points per year”, calculates Mesquita. “Fiscal policy is spending and revenue. If there is a limit to increasing revenue, at some point we will have to contain spending. And we can contain it in a more orderly or less orderly way, through more inflation”, she states.

Regarding the situation compared to peer countries, Mesquita sees a beginning of change, with a worsening in Brazil, and exemplified with the case of Mexico, whose insurance value that must be paid to creditors in the event of the country’s default is 50 basis points below Brazil. In other words, the market sees a greater risk in Brazil.

“Mexico also has a center-left president, but he has had a much more consistent, much softer fiscal policy,” he says.