Opinion – Marcos Mendes: There is no magic in the Budget

The 2023 Budget Bill, presented last week, is provisional. Squeezed by the power of Congress to create spending and by the agenda of a president campaigning for reelection, the Ministry of Economy could not work magic: it presented a document full of loose ends.

The electoral campaign led to a promise to keep the Auxílio Brasil floor at R$ 600 and correct the Income Tax table. With no fiscal space, the Ministry resorted to footnotes saying that after the election “we’ll find a way”. The indefensible extension of the reduction of taxes on gasoline, another electoral hit, will cost R$ 34 billion.

The appetite of Congress had already, in the Budgetary Guidelines Law, set the rapporteur’s amendments at R$ 19 billion. In addition, it forced the executive to reserve the money in advance for this purpose.

Until last year, parliamentarians incurred the political cost of saying what expenses would be cut to finance these amendments. Now, they want the money previously reserved, so they only have the good part: telling them where to spend it.

To deal with this, the Ministry of Economy used another artifice that will not stick: it said in which areas the rapporteur’s amendments will have to be spent. It indicates, for example, that R$ 10 billion will have to go to health and R$ 3.5 billion to readjust the federal civil service.

This is far from the preference of parliamentarians. As usual, they will send a good part of the money to the Ministry of Regional Development, which, in the previous allocation, was left with only R$ 1.5 billion. As a result, it will be necessary to find extra money to guarantee the minimum expenditure on health and the readjustment of the civil service.

Using the explosive combination of too much power and too little accountability, Congress recently passed several spending increases without saying how to fit them into the spending ceiling. To circumvent the extra bill, the Executive edited, on the eve of sending the budget, two provisional measures postponing some of these expenses to 2024 onwards: aid to the cultural sector and increase in the science and technology fund. If Congress overturns or changes the MPs, these expenses, around R$10 billion, will have to be included in the budget.

Another R$ 8 billion of expenses were only made possible because the inflation forecast (IPCA), used to correct the spending ceiling, is overestimated. Congress will have to choose between correcting the ceiling value downwards or maintaining the overestimation of the IPCA and further worsening the loss of credibility of this fiscal rule.

It is not difficult to predict that a new constitutional amendment, approved almost unanimously after the elections, will authorize the entry of extra expenditures into the budget.

Despite all the optimism about the recent increase in revenue, the budget forecasts small revenue growth and a primary deficit of 0.6% of GDP. If this low revenue materializes, the correction of the loose ends described above will bring the primary deficit to 2% of GDP.

In addition, we have to add 0.3% of GDP in precatories that will be issued, but not paid, thanks to the constitutional amendments that authorized the postponement of payment.

For a real interest rate of 4% pa on public debt and a GDP growth rate of 2% pa (two benign conditions compared to our recent history), the primary surplus necessary for the debt not to grow is 1, 5% of GDP. Realizing a deficit of 2.3% of GDP means that we will be 3.8 percentage points of GDP (R$ 380 billion) away from the condition of debt stability.

The Federal Government’s nominal deficit, which includes interest expenditure, is forecast at 6.8% of GDP. But, with the extra expenses, they would go to 8.5%. At the height of the fiscal crisis, in 2015, it reached 8.6%.

Unless the government sworn in in 2023 manages to reorganize the political forces that shape spending and taxation decisions, we will continue our fate of fiscal stagnation and low growth.