Public debt will be above pre-Covid level for at least 10 years

The government’s indebtedness will remain above the pre-Covid level for at least another ten years, according to National Treasury projections.

The forecast is that the public sector net debt (DLSP), which represented 54.6% of GDP (Gross Domestic Product) in 2019, ends 2021 at 58.3% and continues to rise until reaching 68.2% in 2030.

The gradual rise is motivated by factors such as the prospect of higher interest rates and a longer deficit in public accounts, which will demand a greater fiscal effort if one wants to reduce indebtedness over the years.

The Ministry of Economy worked with internal projections in recent months that pointed to a surplus in the government’s result in 2023, but the prospect of more expenses (including the flexibility in the payment of court orders) will postpone the return of results in the blue.

Now, the forecast is for a surplus only in 2024 — completing a 12-year cycle of deficit.

Minister Paulo Guedes (Economy) entered the government defending a positive result as soon as possible and even preached that he could reach the goal in 2019, the first year of government. The task was not completed either before or after the Covid-19 pandemic.

Now, more expenses are planned as a result of the PEC (proposed amendment to the Constitution) of the Precatório — which expands the spending ceiling.

The proposal also establishes a limit for the payment with judicial decisions against the State and throws the surplus to the following years, with the possibility of payments outside the ceiling.

The strategy forms a potential snowball of liabilities while making room for new spending—boosting indebtedness.

The indebtedness trajectory is sensitive to the primary result, interest rates and GDP.

According to the Treasury, the evolution of the indicator depends on factors such as “the creation of an environment of macroeconomic stability that supports real GDP growth, a fiscal balance capable of delivering primary surpluses and conditions for reducing average interest rates deadline”.

The Treasury says that the level is above peers and emerging countries and cites that, in a scenario of worsening economic conditions, the fiscal effort to reduce it to the necessary degree would even be unfeasible.

“In a scenario of higher interest rates and lower GDP, structurally, the fiscal effort needed to reduce the debt will be significant and, in some combinations, even unfeasible in the necessary magnitude”, says the folder in a report.

The data are released as the market monitors the emergence of the omicron coronavirus variant, which raises fears about possible new waves of Covid and the need for new rounds of public spending to contain an eventual resurgence of the health crisis.

Paulo Valle, secretary of the Treasury, says that it is still too early to talk about the risks of the new variant and that the economic team depends on assessments by the Ministry of Health on the need to act.

He was asked how the government will face an eventual new wave and whether the strategy would include so-called extraordinary spending (outside the traditional Budget and therefore the spending ceiling).

In response, he defended the PEC (proposed amendment to the Constitution) of the Precatório —which was approved in the Chamber and is now in the Senate— as an instrument to make room for more spending, including for Covid. But it did not rule out the use of extraordinary credits depending on the severity of the pandemic.

“As for the new wave of the strain in South Africa, it is still too early and we depend on the evaluation of the Ministry of Health, which will update us on the need to act,” he said.

“But, at first, I would like to draw attention to the fact that we are working hard on the approval of the PEC, which opens up a very significant space for implementing the Brazil Aid,” he said.

“At first, our strategy is focused on approving the PEC, which will give us a margin of maneuver even if there is a worsening in this scenario. For now, we are not working with any other alternative. But this will depend on the severity or not of this second wave” , he stated.

Meanwhile, the central government (which includes the National Treasury, Social Security and Central Bank) posted a surplus of R$28.1 billion in October, the third largest in history for the month (considering data updated by inflation).

The result represents a reversal of the deficit of R$3.4 billion registered a year earlier.

The result for October came in above the median expectations of the Prisma Fiscal survey, by the Ministry of Economy, which indicated a surplus of R$ 10.1 billion for the month.

According to the Treasury, the result was influenced both by the evolution of collections and by the better targeting of expenses related to the Covid-19 crisis.

Last year, the country was facing the first year of the pandemic, and the government was implementing measures with stronger fiscal impact — such as increased emergency aid and broader tax deferrals.