Treasury warns of debt above 80% of GDP with PEC and calls for spending restraint

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In the midst of negotiations by the elected government of Luiz Inácio Lula da Silva (PT) to approve the PEC (proposed amendment to the Constitution) that expands public spending, the National Treasury issued a warning about the risk that a strong increase in spending will boost the country’s indebtedness.

In the agency’s estimates, the text approved by the Senate makes room for an extra expenditure of BRL 193.7 billion in 2023 and would put the public debt on an upward trajectory. The indicator would reach 81.8% of GDP (Gross Domestic Product) in 2026.

The projection is higher than in a scenario without approval of the Gastança PEC. In this hypothesis, the country’s gross debt would still rise, but to a lesser extent, reaching 79.1% of GDP over the same period. This year, the indicator should close at 73.7%.

The forecasts are included in the second edition of the Fiscal Projections Report, a document created by the agency in an attempt to provide transparency to the medium and long-term projections for the country’s public accounts. The intention is that the publication be made on a semi-annual basis.

In the report, the Treasury states that there is a “challenging scenario for conducting fiscal policy in the coming years”. This is demonstrated in the finding that, even without the PEC, the country will have greater indebtedness. Therefore, the agency points out the need to adopt measures to review expenses and contain the growth of expenses.

Any new design of a new fiscal rule, however good it may be, will not be able to solve the debt trajectory alone, evaluate the technicians.

“In view of the scenarios presented in this report, the proposal for a supplementary law [prevista na PEC] it must be accompanied by measures to reduce expenditure or increase revenue, capable of improving the path of the primary result in the short term and bringing the debt to sustainable levels. The postponement of these measures results in higher nominal interest paid by the National Treasury and an increase in the country risk, with negative effects on economic growth and inflation.”

To indicate what can happen from now on, technicians built some analysis scenarios. One of them, called the base scenario, considers the current fiscal rules (including the spending ceiling, which limits the growth of expenses to inflation) and a single increase of BRL 100 billion in the ceiling in 2023 – maintained in the following years. The justification is to incorporate the changes in the Auxílio Brasil, which should be renamed Bolsa Família.

The second is the reference scenario, which starts from the base scenario and adds a minimum level of expenses with funding and investments of around BRL 120.3 billion (at 2023 prices). That is, a future easing of the ceiling is allowed for these expenses.

It is this reference scenario that the National Treasury takes as a starting point to project the trend for the next ten years.

Public debt tends to rise because the country is expected to continue running deficits until 2027, with a brief exception in 2026. The picture shows a deterioration in relation to the expectations illustrated in the first edition of the report, in June, when the recovery of the primary surplus —when revenue exceeds spending— as early as 2024.

As a result, gross debt would rise from 73.7% of GDP in 2022 and reach a peak of 80.2% of GDP in 2027. Afterwards, there would be a slow reduction, but the debt would still stand at 77.6% in 2031 —above the current threshold.

The calculations do not consider possible measures to grant readjustments to civil servants or resumption of the minimum wage appreciation policy. These actions are in the plans of the new government.

“Alternative policy measures or events that translate into hypotheses different from the scenario presented for mandatory expenses, such as salary readjustments for civil servants, a real gain in the minimum wage and the incorporation of more families to the Auxílio Brasil could increase the expense by about 1.6 % of GDP by 2031. This reinforces the importance that the increase in the pace of growth of mandatory expenses be offset by the reduction of other expenses, so that discretionary expenses are not excessively compressed and so that it is possible to comply with fiscal rules”, says the Treasury.

In the scenario with the approval of the PEC, the trajectory worsens, but the projections go only until 2026 – when the indicator would reach 81.8% of GDP, 2.7 percentage points above what would be observed without the approval of the proposal.

The Treasury understands that the PEC provides for an additional expenditure of BRL 193.7 billion in 2023. In addition to expanding the spending cap by BRL 145 billion and the possibility of carrying out extra cap spending of BRL 23 billion, the current wording allows the use (for a single time) of R$ 24.6 billion currently held in the PIS/Pasep Fund and which have not been claimed in the last 20 years.

In addition, the simulation considers maintaining the increase in the ceiling of R$ 145 billion in the years 2025 and 2026, a period officially not contemplated by the PEC, which runs until 2024. without other expenses being reassessed”.

“The analyzes and simulations presented here show, therefore, the need to outline a prudent fiscal strategy in order to promote the sustainability of the public debt”, says the document.

The National Treasury not only points out the need to review expenses, but also lists evidence that there is room for this in the Budget.

Redesign of Bolsa Família would save R$ 26 billion, indicates calculation

In another simulation, the agency states that there is the possibility of saving BRL 26 billion in Bolsa Família from a reformulation of the social program.

Today, the policy provides for a minimum payment of BRL 600 per family, regardless of the number of members —which creates distortions, according to specialists. A mother with children ends up getting the same amount as a single man without children.

In addition, the average amount paid in the program is around BRL 605, indicating that most beneficiaries are receiving the minimum amount set by the current Jair Bolsonaro (PL) government. The figure is 170% higher than the average benefit practiced in November 2021, before the reformulation of the social program in Auxílio Brasil.

The Treasury then carried out an exercise applying this percentage of 170% to the old structure of Bolsa Família benefits, which favored a minimum amount per family member.

“For illustrative purposes, if we apply the 170% increase in the average family benefit to the per capita value, so that families with a larger number of members would receive a higher amount than families with fewer people, we would have an annual expenditure of BRL 133 billion. In this scenario, there would be a better distribution of per capita family income and lower expenditure than in the case of a minimum benefit of BRL 600 regardless of family composition (BRL 159 billion)”, says the study.

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