Transition PEC may lead public debt to exceed 90% of GDP in Lula’s term

The Transition PEC presented by the elected government to release expenses outside the spending ceiling has the potential to generate a significant upward trend in the country’s public debt, in addition to putting pressure on inflation and making the work of the Central Bank difficult, evaluate analysts interviewed by Reuters.

Scenarios designed by economists who monitor public accounts point out that the text presented on Wednesday (16) by vice-president-elect Geraldo Alckmin could bring the government’s gross debt, currently at 77.1% of GDP, to 90% at the end of the four-year mandate of Luiz Inácio Lula da Silva.

This is what the director of macroeconomics at Goldman Sachs for Latin America, Alberto Ramos, predicts, who estimated an increase in gross debt to 83% to 84% of GDP by the end of next year. He assessed that this is a “worrying trend”, after the version of the PEC presented the day before represented “a very risky start” for the elected government.

In addition to removing the Bolsa Família program from the spending ceiling for an indefinite period, in an increase of R$ 175 billion in expenses, the PEC also stipulated that part of the revenues arising from any excess revenue will be allocated to public investments, opening space in 2023 for another BRL 23 billion in expenses, also outside the cap rule.

The markets reacted strongly this Thursday (17th), with the Ibovespa falling and the dollar rising, a variable that brings more inflationary pressure on the economy.

“This reduces the freedom for the Central Bank to manage monetary policy. At best, it could delay the delivery of interest rate cuts, but in the extreme, it could also lead to the unfortunate situation where the Central Bank would have to raise the Selic rate again. “, said Ramos.

The BC left the basic interest rate parked at 13.75% in its last two monetary policy meetings, after 12 consecutive hikes that took it from the historic low of 2% in March 2021. BC president Roberto Campos Neto has emphatically defended the need for fiscal balance, emphasizing that this factor is crucial for a more benign trajectory of inflation.

The economist of consultancy Tendências Juliana Damasceno said that the institution changed the assessment of its macroeconomic scenario from neutral to pessimistic after Lula’s statements last week criticizing the ceiling and indicating a focus on social spending to the detriment of the fiscal issue.

As the PEC does not provide for a limited period of validity for the exception to the ceiling, in addition to not presenting counterparts for these additional expenses, Damasceno also projects that the government’s gross debt will reach approximately 90% of GDP in 2026.

“It is a very rapid advance of the debt in a very short period and that deteriorates the other conditions. We start to have a higher risk pricing, this affects our assets, which end up depreciating, affecting interest rates and inflation, which will demand an even stricter (fiscal) rule,” he said.

If confirmed, this will be a strong advance compared to the level of 76.2% of GDP expected for gross debt at the end of this year, in Treasury calculations, a number that should be helped by a devolution of BNDES resources and by the significant jump in collection amid rising commodities.

At its historic peak, Brazil’s gross debt reached 89% of GDP in October 2020, amid massive pandemic spending, according to Central Bank data.

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The fiscal deterioration will also represent an additional detachment of Brazil in relation to emerging middle-income countries, which have gross debt around 65% of GDP according to the IMF, which uses other parameters and already sees the Brazilian gross debt at 88% of GDP today.

The IFI (Independent Fiscal Institution), linked to the Senate, made a preliminary analysis of the PEC and works with a scenario of less drastic increase in expenses, considering that the open space in the ceiling will be wider than the government’s own disbursement capacity.

Economist Vilma Pinto, director of the agency, said that Lula’s promises such as the real increase in the minimum wage and the recomposition of funds for the school lunch and Popular Pharmacy programs should consume less than 10 billion reais of the total space of 105 billion reais that would be opened in the ceiling by the PEC.

She also pointed out that an expansion of public works requires time for the projects to mature, which makes it difficult to spend these funds immediately. In addition, the PEC itself already creates an additional margin for investments, depending on extraordinary government revenues.

“I understand that the government will, in a way, open this space to make the ceiling more flexible. (…) It does not mean that it will spend all this space at the start”, he said, emphasizing that the body is still finalizing calculations on the public debt projection, but that the trajectory will be upward.