Exploding debt scenario won’t happen, says Treasury Secretary

The new secretary of the National Treasury, Rogério Ceron, says that the new economic team of the Luiz Inácio Lula da Silva (PT) government is working to reverse the explosive trajectory of the public debt that is being drawn in the face of the deficit of R$ 231 billion foreseen in the Budget of this year.

In his first interview in office, he is committed to preventing debt from exceeding 80% of GDP (Gross Domestic Product). “If nothing is done, it could indeed reach an explosive trajectory, but that’s not what will happen,” he tells the Sheet.

The fronts of action include review of exemptions and expenses. Ceron also indicates the possibility that the new fiscal rule will give flexibility to public investments, but provide for greater limitation for current expenses (which include salaries and benefits). Check out the main excerpts:

In his inauguration speech, the minister said he did not want to settle for an “absurd deficit of R$220 billion“. How do you intend to achieve this goal? The federal government’s net revenue should be around 18.7%, 18.8% of GDP in 2022. For 2023, the tax waivers made last year drop 1.5 percentage points of GDP. Net income drops to 17.2% of GDP. This means more than R$ 100 billion waived without ballast. It’s a big impact.

You removed the tax burden that existed to fund public policies. If the reduction is maintained over time, it breaks the Brazilian state. It is the same as a family losing an important part of its income and having rent and expenses that cannot be cut. If you cannot find another source of income, you will have a problem of over-indebtedness.

There is a need to re-discuss some of these measures. Many did not have support from the technical areas. They had their legal path, but they did not comply with what is set in the LRF [Lei de Responsabilidade Fiscal], that is: the waiver of revenue must have compensation. This did not happened.

Will we have an increase in the tax burden? Do not. We are not talking about increasing the tax burden, but about waivers that absurdly reduce, without parallel in history, the revenue that is available to support the State. It is a matter of discussing the maintenance of the tax burden that existed at the end of 2022.

And what would those measures be? They may involve the reversal of some of these measures, or others that allow a return to revenue levels. It has a series of exemptions from PIS/Cofins. Exemptions from regulatory taxes, IOF, IPI were made, which need to be evaluated. It does not mean that they will be reversed, but compensatory measures need to be taken.

Wouldn’t it be better to do this already in the midst of the tax reform? The fiscal situation does not await. We have today at LOA [Lei Orçamentária Anual] a primary deficit of BRL 231 billion, it is very important that it be reduced.

The correct discussion of tax reform is about the tax system and its simplification. This will reduce the Brazil cost and increase long-term growth. But ideally, it should be a neutrality solution.

At yesterday’s meeting [terça-feira, 3]there was also discussion about Carf [Conselho Administrativo de Recursos Fiscais]. The CARF is the administrative court that judges taxpayers’ appeals against tax assessment notices drawn up by the Federal Revenue Service. In 2019, he had around BRL 600 billion awaiting judgment. Since then, it has risen to R$1.2 trillion. As long as these credits are not judged, they are not enforceable. Having a quick fix for Carf is essential.

We are discussing a very serious scenario, a deficit of R$ 200 billion, and in the last three years we have [mais] BRL 600 billion in the tax stock. That half of this was actually due and half was not, we are talking about more than necessary to cover the entire deficit for the year.

There is a charge for adjustments on the expense side. What are you going to do? The agenda has to involve both legs. For example, in the management [de Fernando Haddad] as mayor of São Paulo, he sought to review expenses. Existing administrative contracts, rents, general expenses. It was very successful. At the federal level, there is the Council for Monitoring and Evaluation of Public Policies, which already exists and makes recommendations that can help improve programs. There are several notes, for example, on tax waivers. It is time to discuss them.

Already have a number for the primary as a goal? It will depend on the package of actions. The objective is to get as close as possible to a primary equilibrium. And looking at the medium term. It’s a serious scenario, but not impossible to reverse. The adjustment will be made, and the main sign is that in 2024 we will enter a much more comfortable trajectory.

This will create conditions for a reduction in long-term interest rates, the Central Bank will begin a process of reflection on the appropriate moment to relax monetary policy. We have the highest real rate in the world again. We need to reverse it, supporting the BC in this process.

In the medium and long term, do you have any objective for the debt/GDP ratio? The aim is to seek a trajectory of stability and reduction over time. That much is clear.

They say the debt can reach 80%… If nothing is done, it could arrive, but this scenario is not going to happen. In this first semester, fiscal rules and tax reform are the two priority agendas, and they will create a very positive scenario. If nothing is done, this could indeed reach an explosive trajectory, but that is not what will happen. Our quest for sustainability and long-term fiscal solvency is unequivocal. AND [também] the quest to reduce the primary deficit projected for this year.

If we ask what the projection for the cost of debt is, Mr. Won’t you talk now? Rates are under a lot of pressure at the start of the year. It is the right of those who want to invest in bonds to try to find the highest rate that suits them, and it is the Treasury’s role to properly manage this negotiation. We are going through an anxious moment, it is understandable. But starting in the next few weeks, that will change.

The economic team had to carry out fuel exemptions in a broader scope than desired. How will the political debate of the measures be? If one way is not possible, there are other measures. The important thing is to have a path. No one disagrees with the effect that the re-encumbrance on diesel generates in terms of replicating costs in several other segments, but there is also the worthy discussion that it needs to have some tax burden. There has been a very substantial reduction.

But Mr. is drawing a picture that there have never been so many resignations. Wasn’t it better not to have extended the exemption? The fact that we are not reencumbering at this time does not mean that we will not take other compensation measures. This political choice rests with the minister along with the other members of the government.

Caution in disclosing these measures cannot generate noise, giving the feeling that there is a lack of a flight?Since yesterday [terça, 3], we are being more forceful about the formulation of a package of actions. Of course, a detail adds to understand that the plan is credible. Remembering, it’s the first week of government. Studies are advanced, stock combos are prepared. This agenda is super important for the country not to take steps backwards. If we cannot solve it, it creates a difficult scenario for structural reforms.

There are already some proposals for a fiscal framework on the table. What will be doable? What the minister has signaled is that there is no point in creating a perfect rule on paper that is not feasible, credible over time. The ceiling rule did its job, but everyone knew it was unsustainable. In the world, there are different things. There are rules focused more on debt, on budget results. Others are more rigid for current expenses and more flexible for investments. The important thing is to guarantee the solvency trajectory. I believe it will be a convergence of ideas.

But in which direction? Mr. Do you advocate a spending limit? In my view, it has to have bands. We have to work the indicators together. The debt trajectory is an important item. In the long term, in general, you work with the level of debt in relation to GDP, debt/GDP.

Several countries in the world have fiscal rules, except for times of economic recession, making investments more flexible in order to take countercyclical action. Locking everything is bad. The investment lock has to be looked at carefully. For current expenses, I technically understand that it is important to have rules.

A latch? It has to have benchmarks, because hiring a permanent expense means a lot. Even more actions that can no longer reverse themselves over time. The detail is how we create rules to prevent fraud.

Mr. mentioned the LRF. Some PT economists believe that it could be improved, going back to using the surplus, but with a more sophisticated structure. Do you have that on the radar? The perception that there is room for improvement in the LRF is not an imposition of a political or ideological line. The clearest indication is the recurrence of cases of short-term insolvency of states and municipalities. In the last ten years, more than 50% of the country’s municipalities became insolvent during one of these periods. We experience cases that end up affecting the provision of essential public services. What are the goals? Ensure short, medium and long term solvency. This is for the Union, states and municipalities.

How will the relationship with public banks be? Do you see room for subsidies? There is no discussion about it. None. In fact, on the contrary. The current president of the BNDES has signaled that he will seek private funding and market solutions.

There is a fear that past mistakes will be repeated. BNDES had many subsidies, and this had a high cost for the Treasury. Is there reason to fear a return to these practices? President Lula’s mandates were responsible for conducting economic and fiscal policy. I have not seen any signs of interest in wanting to return to this type of policy [de grandes subsídios]. If we repeat everything the same, we will not get different results.

X-RAY

Rogerio Ceron, 41

He is a career tax auditor. He commanded SP Parcerias, concessions and PPPs (public-private partnerships) body of the São Paulo City Hall. He was Finance Secretary of the municipality between 2015 and 2016, during the management of Fernando Haddad (PT). He holds a bachelor’s and master’s degree in economics from Unicamp (University of Campinas) and a doctorate in public administration from FGV (Fundação Getulio Vargas).