Gross government debt could reach 95.3% of GDP in 2031, projects IFI

The worsening of forecasts for the fiscal scenario for the coming years led the IFI (Independent Fiscal Institution) to project that the gross debt of the general government will reach 95.3% of GDP (Gross Domestic Product) in 2031, compared to the forecast 80.9% in May.

The institution, which previously estimated that gross debt would reach 78% in 2022, now projects it to be 76.6% in relation to GDP. However, he warns that this year’s reduction should be reversed next year, due to the worsening of forecasts for the primary result.

The estimate is that the primary result will go from a surplus of 0.5% of GDP in 2022 to a deficit of 0.9% of GDP next year, says the IFI.

After two weeks of negotiation, the vice-president-elect, Geraldo Alckmin (PSB), presented on Wednesday (16) the draft of the text of the Transition PEC, which proposes to remove the Bolsa Família program (currently Auxílio Brasil) from the ceiling expenses permanently and paves the way for honoring campaign promises made by the president-elect, Luiz Inácio Lula da Silva (PT).

The measure is considered necessary to avoid a social blackout next year, since the Budget proposal sent in August by the Jair Bolsonaro (PL) government only guarantees an average value of R$ 405.21 for beneficiaries, in addition to imposing cuts severe cuts in funds for housing and in the Popular Pharmacy.

“In the absence of an effective cap on expenditure growth and without trade-offs on the revenue side, so far, gross general government debt would reach 95.3% of GDP in 2031 under the new IFI baseline scenario,” the report says. .

In this scenario, to stabilize the debt at the 76.6% level of 2022, an average primary surplus of 1.5% of GDP would be necessary, far from the 0.9% deficit projected for 2023.

Also according to the IFI, with the Transition PEC, the potential increase in the Union’s primary expenditures is BRL 173.1 billion for 2023.

Primary expenses are aimed at public health and education policies, including expenses with the SUS (Sistema Único de Saúde) and with the funding of universities, in addition to social security and social aspects —such as the BPC (Benefit of Continuous Provision) and insurance -unemployment.

This type of spending can be mandatory or discretionary. Mandatory expenses are those that the Union needs to carry out (personnel expenses, social charges and Social Security benefits, etc.), foreseen at BRL 2.21 trillion in the PLOA (Annual Budget Law Project) 2023.

The discretionary ones are eligible and are estimated at BRL 98.98 billion for next year, according to the Ministry of Economy.

The institution considers that this is a potential impact. “In our base scenario, we assume that, in addition to the increase in the Auxílio Brasil and the real readjustment of the minimum wage based on the average economic growth of the last five years, discretionary expenses will be gradually recomposed, reaching in 2024 the level of before the pandemic ( 1.8% of GDP).”

In addition to opening a space of R$ 103.3 billion in the ceiling for next year, the PEC allows for the expansion of expenses with the Bolsa Família, of income transfer, estimated at R$ 69.8 billion. “However, the achievement of this potential for fiscal expansion will depend on what the government does with the space that will be opened in the spending ceiling”, says the IFI.

The institution works with a base scenario in which spending reaches 19.7% of GDP in 2031. In alternative scenarios, primary spending varies depending on macroeconomic parameter indicators, such as inflation and GDP, and the volume of investments and social programs .

Economists recall that the country grew above expectations in the first half of this year, but recent data point to a slowdown in consumption and GDP in the third and fourth quarters, despite the recovery of the labor market and fiscal stimuli.

“The slowdown in global economic growth and the lagged effects of the restrictive monetary policy reinforce the prospect of a slowdown in GDP next year”, says the IFI, which projects GDP growth of 2.6% in 2022 and 0.9% in 2023.

The inflation rate measured by the IPCA, which is considered the country’s official inflation, should reach 5.6% in 2022, slowing down to 4.6% in 2023, still above the 3.5% target.

In May of this year, the IFI projected an IPCA of 7.9% in 2022 and 4% in 2023. The basic interest rate, the Selic, is also expected to end the year at 13.75%, decreasing to 11.5% in 2023.

In the medium term, between 2024 and 2031, GDP growth projection is 2% in the base scenario, with the expectation that the idleness of the economy will be eliminated in mid-2024, when GDP will start to walk in line with its potential growth.