Opinion – Marcos Mendes: The inspector, really

Several factors have put the importance of fiscal balance in the background in the political debate. The high value of temporary Emergency Aid, during the pandemic, became the standard for the minimum permanent benefit of Auxílio Brasil. Persistent post-pandemic poverty, as well as fuel and food price shocks, amplifies demand not only for more cash transfers, but also for subsidies and tax cuts.

On the other hand, there is a feeling that there is more money available to spend, as tax revenue is hitting records every month and public debt, as a proportion of GDP, is falling. This perception of loosening of fiscal restrictions, in the middle of the electoral campaign, has led to an auction of promises of spending increases and tax reductions.

It so happens that the recent improvement in fiscal indicators is episodic. In 2022, inflation and high commodity prices were key to both revenue rising and spending and debt eroding.

However, the outlook for 2023 is for falling inflation and commodities, and low GDP growth, reversing the fiscal gains of 2022.

Arithmetic will prevail. Debt growth, measured as a proportion of GDP, is given by the following rule:

Δb = b0*(r – g) – st

Where:

ΔB = growth of debt/GDP between the initial and final moment

b0 = public debt/GDP at the initial moment

r = interest rate on public debt

g = GDP growth rate

s = primary surplus/GDP

Applying the values ​​of the Brazilian economy forecast for 2023 to this formula, we obtain a debt growth of 4.4 percentage points of GDP.

Otherwise, let’s see: gross debt at the beginning of 2023 will be around 77.5% of GDP, real interest on debt at 5% per year and the Focus report predicts a growth of 0.6% of GDP for 2023. The primary balance in 2023 must be negative by at least 1% of GDP.

The debt would then reach 81.9% of GDP at the end of next year (77.5 + 4.4). It’s a very strong growth.

If this pace is maintained in the following years, the interest rate (r) needed to cover the risk of growing debt will increase. This will raise the cost of investments, bringing down economic growth (g). That is, in the formula above, debt growth (∆b) will accelerate.

It is the sure path to economic stagnation and poverty.

Suppose the new government is convinced of the importance of controlling the debt, and is willing to reduce it from 81.9% of GDP at the end of 2023 to 80% of GDP at the end of the mandate, in 2026. An unambitious target, given that the average gross debt of emerging countries is just over 65% of GDP.

Let’s be optimistic and imagine that the country manages to grow 2% per year in the triennium 2024-26 and that the interest rate on debt drops to 4% per year. This means, by the formula above, that we will need a primary surplus of 2.26% of GDP in each of the three years.

Given that our starting point is a primary deficit of 1% of GDP in 2023, we are talking about a fiscal adjustment of around 3.26 percentage points of GDP, approximately R$330 billion.

A totally different reality from the “billion show” that you watch during free election hours.

It will not be possible to make this adjustment simply by raising taxes. Our tax burden is already very high and of low quality. Increasing it will decrease GDP growth (g), worsening debt dynamics. There is some room to earn revenue by revoking inefficient tax benefits, but this has proven difficult.

Another way is to reduce debt through privatization and asset demobilization. If done well, they can not only reduce “b0”, but also increase “g”, by improving the efficiency of privatized companies. But this process is slow and the equity is finite.

Therefore, it is inevitable to control the growth of expenditure.

To do so consistently and perennially, it is necessary to dismantle privileges, focus public policies on priority objectives, reduce spending rigidities and increase the operational efficiency of the public sector.