PT tries to convince market that it will seek compensation for PEC expenses

Under strong criticism of the PEC (proposed amendment to the Constitution) of the Transition, the government of the president-elect, Luiz Inácio Lula da Silva (PT), faces the challenge of convincing the market that it will adopt measures to compensate for the extra expenses and maintain debt under control.

The intention to pursue these objectives has permeated the most recent statements by members of the transition team, such as the coordinator and elected vice-president, Geraldo Alckmin (PSB), and former ministers Aloizio Mercadante and Fernando Haddad —the latter quoted to take over the Ministry of Finance in the new Lula government.

In recent days, the transition team intensified this discourse and started to wave measures such as reversal of tax exemptions, periodic evaluation of expenses and fine-tooth combing in contracts, in an attempt to mitigate the negative impact of the PEC and indicate commitment to fiscal responsibility . But the lack of details and concrete promises still generates distrust in the market.

The demand for a plan to finance expenses was evident in the reaction of the financial market to Haddad’s speech on Friday (25) during a luncheon promoted by Febraban (Brazilian Federation of Banks). The former minister spoke of “management shock”, improvement in spending efficiency and reassessment of expenses – but, without tangible measures, it generated frustration.

The transition has been alerted by different interlocutors, technicians and politicians, about the need to think about measures that mitigate the impact of the Transition PEC on the public debt. The invoice forecast has already reached R$ 198 billion, although the most recent discussions point to a negotiation closer to R$ 150 billion, as shown by the Sheet🇧🇷

The number is considered “more palatable”, but it would still require efforts to neutralize part of the additional hole in the accounts, in the evaluation of people who participate in the discussions.

The 2023 Budget was sent with a projected deficit of BRL 63.7 billion. Whenever the government spends more than it collects, this difference is funded via the issuance of public debt securities, with interest payments —hence the concern with the excessive widening of the gap.

On Tuesday (22), the Ministry of Economy stated that it foresees higher revenues next year and reduced the deficit estimate to R$ 40.4 billion, equivalent to 0.4% of GDP (Gross Domestic Product). But there is a perception in the transition that revenues are underestimated and that, therefore, the deficit projection for 2023 could be reduced to something around R$ 20 billion (not considering the effects of the PEC).

In this scenario, an increase in expenses of something close to R$ 150 billion would raise the public deficit to a level of around 1.6% of GDP. There is a perception, however, that the ideal would be to keep the gap below 1% of GDP, to remove uncertainties about the sustainability of the country’s accounts.

Assistants claim that the expansion of spending concentrated on income transfers and investments encourages consumption and will, consequently, have a favorable multiplier for the economy, expanding growth and tax collection. In this way, a part of the additional expense would return in the form of revenue.

There is recognition, however, that this gain is insufficient and it will be necessary to adopt other measures.

One possibility is to obtain the approval of a bill authored by the President of the Senate, Rodrigo Pacheco (PSD-MG), which authorizes a new round of repatriation of resources.

In 2016, a law authorized taxpayers who had undeclared assets or money (but of legal origin) abroad to regularize their situation under advantageous conditions. The Federal Revenue raised almost R$ 47 billion with the measure, in values ​​at the time.

The value to be obtained from the new round is still uncertain and may be below what was seen six years ago, but the initiative is considered a possible source of extra funds in 2023.

Another alternative is the review of so-called tax expenditures, exemptions granted by the government to include sectors and which should drain R$ 456 billion from public coffers next year. The path is considered difficult due to the history of pressure from different groups against the reduction of benefits.

The new government still has the option of reviewing the exemption of federal taxes on fuels, which today have zero rates. The cost of the measure is BRL 52.9 billion, and a reversal, even if partial, would help to rebuild the Union’s revenues.

The discussion, however, is delicate because the increase in fuel prices could generate a price shock. In an interview with Sheeteconomist Guilherme Mello, one of the coordinators of the transition economy group, said that the exemption can be maintained “at first”, with a subsequent reassessment of the scenario.

Economists outside the new government are uncomfortable with the disconnect between the debates. “The urgency of the social benefit is no excuse for not discussing forms of financing”, says the economist at ASA Investments, Jeferson Bittencourt, former secretary of the National Treasury. He points out that there is already a series of diagnoses made inside and outside the government. “The issue is to incorporate this into the Budget.”

Bittencourt lists, as examples, studies that indicate the possibility of revising or extinguishing two policies: exemption from the basic food basket and exemption from Income Tax for taxpayers over 65 years of age.

In the case of the basic basket, the government must give up R$ 34.8 billion in 2023 to exempt items such as rice, meat, cheese and hygiene products. “The problem is that it’s not just poor people who buy rice. And there are things in this basic basket that the poor don’t even buy, like salmon and brie cheese,” he says.

The study carried out in 2018 by government technicians suggested that directing half of the tax exemption value to the Bolsa Família produced the same reduction in inequality. “Now that we have already increased income transfers, we still need to end the exemption from the basic food basket”, says the former secretary.

The Income Tax exemption for taxpayers over 65 years of age should drain R$ 13 billion next year and, according to Bittencourt, benefits Brazilians with higher incomes who suffer the incidence of the tax. “And after all, is the tax on income or on age?” he asks.

Economist Gabriel Leal de Barros, partner and chief economist at Ryo Asset and former director of the IFI (Independent Fiscal Institution) of the Senate, proposes a combination of reforms that could, according to him, save R$ 700 billion in a decade.

The menu includes the approval of an administrative reform valid only for new civil servants, with a limitation of initial salaries for generalist categories and gradual career progression; the merger of social policies such as Auxílio Brasil, Auxílio Gás, Farmácia Popular, among others; and the focus on salary bonuses, a kind of 14th salary paid to workers with a formal contract and remuneration of up to two minimum wages.

In 2024 alone, a combination that includes these three points could generate savings of at least BRL 39.6 billion, estimates Barros.

Economist Manoel Pires, former secretary of Economic Policy at the Ministry of Finance, defends the need for long-term fiscal planning, but warns against what he considers a “common error” in recent proposals: the elaboration of fiscal scenarios with well-balanced revenues lower than what is observed in practice.

In an article published in Ibre/FGV’s November Macro Bulletin, he cites as an example the expected growth in revenue from royalties, special participations, dividends and taxes in the oil sector in the coming years. This revenue stood at 0.92% of GDP on average from 2011 to 2020, but could rise to 2.11% of GDP in 2022 to 2030, according to calculations by economist Bráulio Borges.

“When one takes into account the increase in collection, the reforms can be incremental, and the solution to the fiscal challenge becomes viable, reconciling fiscal sustainability and the viability of the Budget with protection for the most vulnerable”, says Pires.