Opinion – Samuel Pessôa: Fiscal contraction in 2023

In the last column for 2021, I bet that growth in 2022 would be 1% to 1.5%.

Two would be the engines of growth: first, the normalization of the service sectors, mainly other services, still very affected by the epidemic; and second, the positive fiscal impulse, the result of the political cycle in public expenditure in an election year.

Additionally, strong job creation due to the normalization of services generates an additional boost on demand. In fact, in the first quarter, compared to the first quarter of 2021, the real wage bill grew by 3%.

The monetary policy that works against growth should only affect economic activity in the fourth quarter of 2022. Anyway, with what we had in terms of growth until May, there are indications of a scenario for activity in 2022 that is a little better than I imagined in the past. end of 2021. The economy is expected to grow something like 2% in 2022.

On the other hand, we have been receiving bad news on the inflationary front. After an incredible set of inflationary shocks since the second half of 2019, there are, more recently, numerous signs that inflation is taking on a life of its own. Inflation becomes inertial.

With that, the year will end with the unemployment rate between 9% and 9.5%, with inflation, without manipulations, around 9.5%, and, probably, service inflation in the range of 8% to 9%. The new government will receive an economy close to the natural rate of unemployment, that is, close to full employment, with very high and inertial inflation.

There won’t be much choice. The new government will have to reduce public spending in 2023. GDP growth in 2023 is likely to be negative. We will have both fiscal and monetary policy, with the correct signal given the conjuncture, which is the contractionary signal. If fiscal policy is not contractionary in 2023, we will only reap more inflation and more public debt, which means even more inflation ahead.

And the social crisis? What to do? Social crisis is fought with a welfare state financed through tax revenue. There is no better way out. We will have to increase the tax burden as early as 2023 or reduce spending on other budget items, in order to have a public budget in order to increase social assistance.

Any other solution is to bet on the Latin American populism that generated the economic disaster in Venezuela and the inflation that runs to 80% a year in Argentina.

In September of this year, I will be occupying this space for a decade. In the beginning, my agenda was the social contract of redemocratization. The absolutely legitimate decision of our society to prioritize the reduction of inequality and leave economic growth as a residual variable.

Since the end of 2013, when it became clear to me that we had a serious structural fiscal problem, the column’s agenda has been to try to help society find a non-inflationary balance. We are still in the midst of this problem.

Everything indicates that political equilibrium will demand a new round of tax increases. And everything indicates that, correctly, ways to do so that are more socially just will be sought.

​On how to do this, interested parties should consult the recently published book in electronic format, “Tax Progressivity and Economic Growth”, organized by my FGV Ibre colleague, Manoel Pires, with the support of Samambaia Filantropias.