States increase investment in the 1st quarter, but already see a slowdown in revenues

States increase investment in the 1st quarter, but already see a slowdown in revenues

Investments from states and the Federal District grew 176% above inflation in the first half of 2022 compared to the same period in 2021, according to a survey by the IFI (Independent Fiscal Institution) with updated figures until June this year. These expenses represented 10% of current expenses in the period, compared to 4% in the same period last year.

Expenditure data show an increase spread across several headings. Among them, education, urbanism, housing, sanitation, social assistance, work, culture and transport.

When looking at total expenditure, however, the numbers are more modest. There was a real increase (above inflation) of 5% in the period, with large items such as civil servants’ pensions, health and expenses of other state Powers growing below average.

The first half of 2022 was marked by the seasonality of the electoral year, with more expenses concentrated in the first months of the year. There are also issues related to the pandemic that explain the increase in spending less on health and greater on education this year.

Another issue that helped the investment was the increase in revenues, which improved the cash position of these entities.

The numbers collected by the IFI point out, however, that this improvement was not so great, when considering the impact of inflation. In addition, collection has been on a slowing path since the beginning of the year, a process that was accentuated in July, after the ICMS (state tax on goods and services) exemptions approved by Congress.

Current revenue grew 10% in the first half, driven by a 13% increase in transfers. The collection increased 5% in real terms.

Responsible for the survey, IFI director Vilma Pinto says that the revenue result is “good, but nothing extraordinary”, contrary to what has been pointed out by the federal government. She also sees a simultaneous process of permanent revenue reduction and expenditure increase that will affect the fiscal situation of states in the medium term.

The complementary law approved by Congress, for example, changed the rate of sectors that represent 37% of ICMS. Among them, fuel, telecommunications, electricity and public transport.

“I am concerned about the fiscal situation of these entities. Not when we look at the current picture, but when we try to project it into the future”, says the director of the IFI.

“You have dealt with a significant volume of the main state tax. Several states have resumed tenders and granted readjustments. These are expenses with a permanent and long-term impact. Some investments can also become current expenses later on.”

According to the IFI survey, cash availability grew 25% in the semester, but the institution emphasizes that a good part of the money is linked to mandatory expenses. “The level of cash does not mean much. You have to look at how much you spend, how much you owe, how much you collect. What is there can have a destination, a specific obligation. It does not necessarily mean liquidity”, says Vilma.

Data from the São Paulo State Finance Department show that ICMS collection slowed from an annual growth of 17% in January to 9% in July of this year, a month in which ICMS exemptions are already reflected. On average in Brazil, it went from 15% in the 12 months up to January to 10% up to May, the latest consolidated data available.

“There is a deceleration, in the accumulated, and real fall in the comparison July against July”, says Felipe Salto, Secretary of Finance and Planning of the State of São Paulo.

“The analysis, therefore, has to be done carefully. There is not a rosy picture as the federal government has tried to paint. The good thing about São Paulo is that it has done its case lesson and has balanced fiscal accounts.”

Last week, representatives of the Ministry of Economy and state governments participated in a meeting of the special commission created by the Federal Supreme Court (STF) to discuss the dispute between the two parties over the ICMS. Minister Gilmar Mendes is the rapporteur of the actions that deal with the law passed by Congress.

The states argued that there was a drop in ICMS collection last month and that, with the loss of revenue, essential services could be compromised.

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