Only half of the economic measures presented by Finance Minister Fernando Haddad (PT) are deemed feasible by economists, in light of the political difficulties and the risks of frustration highlighted by the minister himself in presenting his plan to improve the public situation accounts.
The package promises to provide an adjustment of up to R$242.7 billion, of which about R$120 billion are indicated as achievable, according to specialists consulted by the Sheet.
The reduction of the budget deficit, even if partial, is seen as something positive, but the uncertainties about the promises of the new government and the scarcity of initiatives with a lasting effect are worrying. Most of the proposals generate windfall revenue to strengthen cash this year, which will not necessarily repeat in subsequent periods.
The fear is that, after some fiscal respite in 2023, the accounts will deteriorate significantly again in 2024, as the short-term effect of Haddad’s plan wears off.
ASA Investments economist Jeferson Bittencourt, former secretary of the national treasury, calculates the impact of the measures with the greatest chance of success at R$ 120 billion. In this list he includes the variation of the ICMS credits, the re-engagement of the PIS / Cofins on the financial income of large companies, the revision of the Confederation’s collection forecasts and the cut in expenses.
If this reading is confirmed, it will only mean a partial reduction of this year’s gap, forecast at 231.55 billion reais, without reaching the 11.1 billion reais surplus indicated by the Ministry of Finance as a possible result, if all the initiatives were fully respected .
“We have to welcome when the economic team is willing to reduce the deficit substantially. It is clear that, to a large extent, this is a deficit generated by the PEC [proposta de emenda à Constituição que autorizou o aumento de gastos em 2023], which had the blessing of the economic team. But there is an intention, within the package there are measures that are positive”, evaluates Bittencourt.
A similar analysis was made by Barclays chief economist for Brazil, Roberto Secemski, in a report to clients. He also estimates that the most feasible actions should result in a fiscal effort close to R $120 billion.
“Although this is a step in the right direction, in trying to reduce the size of the deficit this year, the measures rely too heavily on revenue adjustments rather than expenditure, and most of them are extraordinary or uncertain, so we cannot constitute a structural adjustment to effectively recover the primary surplus needed to stabilize or reduce the public debt trajectory”, reads the document.
The biggest uncertainties concern fuel charging and the government’s efforts to reduce tax litigation and encourage taxpayers to pay off their debts by granting generous discounts, in some cases not only on interest and penalties, but also on the principal amount of the tax due.
The government expects to raise R$ 28.9 billion with the resumption of PIS/Cofins tariffs on gasoline and ethanol starting in March, but the finance minister himself acknowledged that this measure is not guaranteed.
“That doesn’t stop the president [Luiz Inácio Lula da Silva] to re-evaluate these deadlines, depending on the political assessment it makes, which requires us to continue to pacify this country,” Haddad said.
R$70 billion remains dependent on the success of litigation reduction initiatives and taxpayer compliance with debt rescheduling. Market insiders cite a lack of metrics to tell whether or not that’s a realistic estimate.
Even in expenses there is a certain degree of uncertainty. Part of the cost reduction is seen as feasible, especially with the government’s increased willingness to review procurement and public policies, noted by the Minister of Planning and Budget, Simone Tebet (MDB). For example, a careful evaluation of the beneficiaries of Brazilian aid is awaited.
Economists stress, however, that there is no mechanism that imposes the cut, but a general guideline. Furthermore, there are legal doubts about the possibility of executing BRL 25 billion less than foreseen in the Budget, as reported by Haddad’s team.
“There does not appear to be legal support for the contingency, given that the measures taken at the end of 2022 have significantly increased the primary deficit target and the expenditure ceiling, which are the two legal parameters that trigger the statutory expenditure obligation of contingency,” says economist Marcos Mendes, research associate at Insper and columnist at Sheet.
Bittencourt argues that the lack of clarity about this lower expenditure execution generates uncertainty about the effective power of the economic plan.
Even if some technical impediment ascertained during construction provided the necessary legal support for the non-execution of the expenditure, the ideal would be for the government to send a bill to cancel the assignment, in order not to run the risk that the space will be busy with other expenses. Apply the same reasoning to any gaps generated by contract revisions.
The former Treasury secretary also criticizes the fact that the government, in his opinion, has not committed its political capital to the package. “Most of the adjustment they’re proposing, around R$130 billion, doesn’t interfere with anyone’s interests,” he assesses. The new fuel footprint, which would require government attrition, fell precisely on the spectrum of those that may not materialize.
Economist Felipe Salto, partner and chief economist at Warren Renascença, assesses that the package has been positive, but also expresses concern that many of the measures will have their impact concentrated in 2023.
“It remains to say what the new fiscal framework will be. The spending ceiling has now become unrealistic, it has a series of external expenses”, says Salto, highlighting the need to have a parameter for the behavior of the accounts in the medium term.
“It was a good start, but what worries me the most is the debt. There are signs that it will grow for a while, and that’s important. But even so, the debt will grow until at least 2025.”
Salto also cites the lack of more ambitious measures on the expenditure side as one of the shortcomings of the presented plan. “Fiscal adjustment is first and foremost a policy measure. You have to choose whether you want the debt to grow, stable or fall, whether the measures are on the side of spending or revenue.”
For him, one measure that should be on the radar is decoupling social security benefits from the minimum wage. Thus, according to him, it would be possible to give real increases to workers without putting pressure on the INSS accounts. “Obviously this isn’t popular, but it’s an open wound that needs to be touched at some point,” he says.
Mendes, in turn, points out that there are risks not accounted for by Haddad’s team and that can put pressure on expenses, such as transfers to the cultural sector (R$ 3.9 billion), the impact of the new treatment plan (R$16 billion), reparations to states in sectors such as health and education (R$25 billion) and a possible settlement of payments of deferred court sentences (R35 billion). With these risks, the actual deficit could reach R$ 183.9 billion.
Secemski, of Barclays, warns that the accumulation of pressure on the Budget could lead the government to the need for a tax reform that translates into an increase in the burden, precisely to help finance the country’s accounts and control debt. “Debates about the various tax reform proposals will gain momentum in the coming months, particularly if there are changes from the initial drafts, which were originally intended to be tax-neutral,” the report said.
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