Monday, February 6, 2023
HomeEconomyOpinion - Marcos Mendes: The limits of fiscal adjustment

Opinion – Marcos Mendes: The limits of fiscal adjustment


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On Thursday (12), the Minister of Finance presented a package of fiscal measures that, according to the figures presented, could transform a deficit of 2.16% of GDP into a surplus of 0.1%. Given the uncertainty of projections and risks of non-compliance with targets, the minister says he is satisfied with a deficit of up to 1% of GDP in 2023.

In reality, getting to that 1% will require a much greater tuning effort. Several numbers seem overly optimistic.

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Revenue was revised upwards at R$36.4 billion. This gain will only occur if the high level of commodity prices on the international market is maintained, which is the main factor responsible for the excellent collection in 2022. It is unlikely, given the slowdown in the international economy.

There is a forecast of savings of R$ 25 billion through renegotiation of contracts. Non-mandatory spending (where these contracts are included) is just over R$ 100 billion a year, so it is not feasible to expect such savings.

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It is also foreseen the possibility of not executing all the expenses authorized in the Budget Law, saving BRL 25 billion. Here there is a legal impossibility. Since 2019 the budget is mandatory. It is only possible to set aside expenses if the primary result target or the expenditure ceiling limit is under threat of noncompliance. It so happens that the PEC of the Transition and the PEC of the nursing floor created so many exceptions to the primary and the ceiling, that it became practically impossible to disobey them. Therefore, there will be no legal support for not executing the expenses.

The end of fuel exemptions would yield R$ 29 billion. But the Minister announced that the end of the exemption has not yet been decided. Therefore, it could not be on the account.

There is also a forecast of raising R$ 70 billion through changes in the rules relating to tax liabilities under administrative discussion and incentives for tax regularization. There was no clear justification for such high values.

Another problem is that the package does not take into account expenses already decided by Congress and which are not included in the budget. There are the payment of the nursing salary floor, the incentive to culture (Paulo Gustavo Law), compensation that the Union will have to make to the states due to a veto overturned by Congress in the law to reduce ICMS rates. It also does not consider the precatories due that are not being paid.

After all, the 2023 deficit would be no less than 1.8% of GDP. To reach the 1% desired by the Minister, additional measures will be necessary, such as the rationalization of Bolsa Família expenses, the effective re-encumbrance of fuel, the re-encumbrance of the IPI, the maintenance of the minimum wage at R$ 1,302.00 throughout the year.

Another problem is that the package is focused on measures that only take effect in 2023. From 2024 onwards, even with the additional measures listed above, we would return to a deficit of 1.8% of GDP.

For the Net General Government Debt to stop growing, we need a primary surplus of 2% of GDP. Moving from a 1.8% deficit to a 2% surplus requires an adjustment of 3.8 percentage points of GDP. If states and municipalities help with 0.8% of GDP, there would still be an effort of 3% of GDP. It is impossible to do so without privatizations, extinction of inefficient programs, decoupling of revenues, moderation in the readjustment of the minimum wage and readjustments to civil servants. Most of these measures have already been discarded by the President of the Republic.

The Ministry of Finance is doing what is possible, within the political restrictions imposed on it. The problem is that this possibility is far from being enough. The Transition PEC and other measures approved at the end of 2022 exacerbated the imbalance. We can change the name of public spending to “investment”, “Joaquim” or “Manoel”. But that does not change the nature of the facts.

The good news is the creation of a fiscal risk committee, to improve the Union’s defense and reduce the future account of precatorios, and the emphasis on evaluating public policies that may, in the future, help to extinguish or reformulate inefficient programs .

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