Revenue review for 2023 may ease the gap left by the Transition PEC

The revision of the revenue projections for 2023 may alleviate the impact of the PEC (proposed amendment to the Constitution) of the Transition on the country’s budget deficit, according to members of the transition team of the elected government of Luiz Inácio Lula da Silva (PT) and economists from outside the government.

The assessment is that the amount of revenue indicated in next year’s budget proposal is underestimated and does not reflect the real trend for the country’s fiscal situation.

Without changes, the 2023 Budget proposal today demonstrates a scenario of a drop in revenues as a proportion of GDP (Gross Domestic Product) as intense as that which occurred in 2020, when tax collection was severely affected by the effects of the Covid-19 pandemic on economic activity.

In 2022, net revenue should reach BRL 1.86 trillion, according to the most recent estimate released by the Ministry of Economy. The value is equivalent to 19.2% of GDP.

The Budget bill was forwarded on August 31, with an estimated net collection of R$ 1.804 trillion. The figure represents 17% of GDP and, compared to 2022, means a nominal drop in revenue — a scenario considered difficult to achieve because the price increase itself contributes to raising the tax base.

Only at the height of the pandemic was there such a sharp drop, above two percentage points of GDP: net revenue fell from 18.2% in 2019 to 16.1% in 2020.

The revenue projection is relevant because it is included in the government’s primary result account, which indicates the difference between revenue and expenditure. When this value is negative, it is a sign that the country had to take on more debt to meet its commitments. The cost of this debt is close to the basic interest rate, the Selic, currently at 13.75% per annum.

The 2023 Budget foresees a deficit of BRL 63.7 billion. The combination of the Transition PEC with this scenario would result in a considerable deficit — amplifying the discomfort of the financial market with the proposal.

The protocoled text seeks to authorize up to R$ 198 billion outside the spending ceiling —fiscal rule that limits the advancement of expenses to inflation variation— by excluding expenses with the new Bolsa Família and investments. But negotiations between parliamentarians can reduce this value to something closer to R$ 150 billion, as shown by the Sheet🇧🇷

Even with flexibility, the text has been heavily criticized by the financial market, which sees room for an extra authorization of a maximum of R$ 100 billion. A higher value could, in the assessment of this wing, increase the risk of public debt being out of control.

The PT itself has sought to map out measures that can mitigate the impact of the PEC on the country’s indebtedness. But there is also an attempt to point out the underestimation of revenues as a factor that should be placed in the balance, contributing to improve the accounts scenario.

Since the Budget proposal was sent, the Ministry of Economy itself has raised its estimates of net revenue in 2022 by BRL 81 billion, noted Fernando Montero, chief economist at brokerage Tullet Prebon in a report distributed to clients. “Since the submission of the PLOA in August, the revenue base in 2022 has not stopped rising. This is the auspicious note”, he said.

For next year, the Economy communicated to the CMO (Mixed Budget Commission) an increase of R$ 23.1 billion in forecast revenues, but the amount was not officially incorporated during the course of the Budget.

During the transition, estimates of an increase close to R$ 50 billion in 2023 revenue were circulated, but the final number will still depend on a series of factors, such as the revision of the GDP of previous years by the IBGE (Brazilian Institute of Geography and Statistics ). In addition, a review of the estimated activity growth in 2023 may minimize the positive effect of tax collection. The Budget has an expansion of 2.5%, while the market expects an average of 0.7%.

Economist Manoel Pires, coordinator of the Fiscal Policy Observatory of Ibre/FGV (Brazilian Institute of Economics of the Getulio Vargas Foundation), says that an increase in expenses for 2023 reinforces the perspective of a deficit in the accounts, but does not necessarily exacerbate the fiscal deficit. at the same intensity.

“The fact that BRL 150 billion is being negotiated now does not mean that the deficit will worsen by BRL 150 billion”, he warns. “The waiver [licença para gastar] of the government, whatever it may be, does not mean that the worst will be the same.”

For him, a drop in revenues from 19% to 17% of GDP would be the same as predicting a “crisis scenario”, not feasible considering the expectation of maintaining some positive factors for revenue, such as higher oil prices.

“The average collection since 2017 is 17.8% of GDP, with a pandemic in the period. Despite being sensible to be conservative in the projection of collection, when considering the numbers, it is more likely that the collection will surprise upwards”, affirm. “How much better the collection will be is still hard to say.”

Pires also points out that there is a structural change in the revenues linked to the oil sector contracted for the coming years. He cites a study by economist Bráulio Borges, also from Ibre/FGV, which points to a significant growth in the collection of royalties, special participations, dividends paid to the Union and taxes from companies linked to the sector.

The collection of these amounts was 0.92% on average from 2011 to 2030, but would rise to 2.11% of GDP on average from 2022 to 2030, considering a barrel of oil at US$ 65 (R$ 345). Even in more conservative scenarios, with a barrel at US$ 45 (R$ 239), there would still be growth.

“What happened this year was very expressive growth due to inflation and very high commodity prices. What we are calling attention to is that what happened this year will occur structurally, because of the increase in production, mainly from 2025”, says Pires. The calculations take into account prospects for oil auctions and production projections from the ANP (National Petroleum Agency).

He argues that these data need to be taken into account when thinking about the future scenario, especially in the medium term, and the new fiscal rule itself, so as not to run the risk of overestimating the necessary adjustment to keep the debt trajectory under control.

“If you design fiscal plans with revenue down there, you reduce spending too much, and then you break the ceiling. You end up putting yourself in a situation of having very ambitious fiscal planning, you design fiscal rules with that ambition and it fails”, he warns.