Feasible impact of Haddad’s package is close to R$ 120 billion, economists assess

Only half of the economic measures presented by the Minister of Finance, Fernando Haddad (PT), are considered feasible by economists, in view of political difficulties and risks of frustration pointed out by the minister himself when presenting his plan to improve the picture of public accounts.

The package promises to deliver an adjustment of up to R$ 242.7 billion, of which around R$ 120 billion are listed as possible to be achieved, according to specialists consulted by the Sheet.

The reduction in the deficit in the accounts, even if partial, is seen as something positive, but the uncertainties surrounding the new government’s promises and the scarcity of initiatives with a lasting effect are points of concern. Most of the proposals generate extraordinary income to reinforce cash this year, which will not necessarily be repeated in the following periods.

The fear is that, after some fiscal respite in 2023, the accounts will again deteriorate significantly in 2024, as the short-term effect of Haddad’s plan dissipates.

ASA Investments economist Jeferson Bittencourt, former secretary of the National Treasury, calculates the impact of measures with a greater chance of succeeding at R$ 120 billion. In this list, he includes the change in ICMS credits, the PIS/Cofins reencumbrance on financial income from large companies, the revision in the federal government’s collection projections and the cut in expenses.

If this reading is confirmed, it will mean only a partial reduction in this year’s gap, projected at BRL 231.55 billion —without reaching the surplus of BRL 11.1 billion indicated by the Ministry of Finance as a possible result, if all initiatives were fully complied with.

“We have to welcome when the economic team is willing to substantially reduce the deficit. It is clear that, to a large extent, it is a deficit generated by the PEC [proposta de emenda à Constituição que autorizou o aumento de gastos em 2023], which had the blessing of the economic team. But there is an intention, within the package there are measures that are positive”, evaluates Bittencourt.

A similar analysis was made by the chief economist for Brazil at Barclays, Roberto Secemski, in a report to clients. He also estimates that the most feasible actions should result in a fiscal effort close to R$ 120 billion.

“While this is a step in the right direction, in an attempt to reduce the size of the deficit this year, measures are excessively based on revenue rather than expenditure adjustments, and most of them are extraordinary or uncertain, therefore not constituting a structural adjustment to effectively recover the primary surplus needed to stabilize or reduce the public debt trajectory”, says the document.

The greatest uncertainties are related to fuel recharging and the government’s efforts to reduce tax disputes and encourage taxpayers to settle their debts by granting generous discounts —in some cases, including not only interest and fines, but also the principal amount of the tribute due.

The government expects to obtain R$ 28.9 billion with the resumption of PIS/Cofins charges on gasoline and ethanol starting in March, but the Minister of Finance himself acknowledged that this measure is not guaranteed.

“That doesn’t stop the president [Luiz Inácio Lula da Silva] to reassess these deadlines, depending on the political assessment he makes, which requires continuing on a course of pacifying this country,” said Haddad.

There is still R$ 70 billion that depend on the success of initiatives to reduce tax disputes and on taxpayers’ adherence to debt renegotiation. Market members cite the lack of parameter to say whether or not this is a realistic estimate.

Even in expenses, there is a certain degree of uncertainty. Part of the cost reduction is seen as viable, especially with the government’s greater willingness to review contracts and public policies, verbalized by the Minister of Planning and Budget, Simone Tebet (MDB). There is an expectation, for example, of a careful evaluation of the beneficiaries of the Brazil Aid.

Economists point out, however, that there is no mechanism that imposes the cut, but rather a generic guideline. In addition, there are legal doubts about the possibility of executing BRL 25 billion less than foreseen in the Budget, as signaled by Haddad’s team.

“There does not seem to be legal support for contingency, given that measures taken at the end of 2022 greatly increased the primary deficit target and the spending ceiling, which are the two legal parameters that trigger the legal obligation to contingency expenses”, says the economist Marcos Mendes, associate researcher at Insper and columnist at Sheet.

Bittencourt states that the lack of clarity about this lower execution of expenses generates insecurity about the effective power of the economic plan.

Even if some technical impediment verified in works gives the necessary legal support for the non-execution of the expense, the ideal would be for the government to send a bill canceling the allocation, so as not to run the risk of the space being occupied with other expenses. He applies the same reasoning to any gaps generated by contract revisions.

The former Treasury secretary also criticizes the fact that the government, in his view, has not committed its political capital to the package. “Most of the adjustment they are proposing, around R$ 130 billion, does not affect anyone’s interest”, he assesses. The re-encumbrance of fuels, which would require government attrition, was precisely on the spectrum of those that may not materialize.

Economist Felipe Salto, partner and chief economist at Warren Renascença, assesses that the package was positive, but also expresses concern about the fact that many of the measures will have their impact concentrated in 2023.

“What remains to be said is what the new fiscal framework will be. The spending ceiling has now become unrealistic, it has a series of expenses on the outside”, says Salto, highlighting the need to have a parameter for the behavior of the accounts in the medium term .

“It was a good start, but what worries me most is the debt. There are signs that it will grow for a certain period, and that is important. But even so, the debt will grow at least until 2025.”

Salto also cites the lack of more ambitious measures on the expenditure side as one of the shortcomings of the plan presented. “The fiscal adjustment is a political measure, first and foremost. You have to choose whether you want the debt to grow, stable or falling, whether the measures are on the side of expenditure or revenue.”

For him, a measure that should be on the radar is the decoupling of social security benefits from the minimum wage. Thus, according to him, it would be possible to give real raises to workers without putting pressure on INSS (National Social Security Institute) accounts. “Of course this is not popular, but it is an open wound that needs to be touched at some point,” he says.

Mendes, in turn, points out that there are risks not accounted for by Haddad’s team and that can put pressure on expenses, such as transfers to the cultural sector (R$ 3.9 billion), the impact of the new nursing floor (R$ 16 billion) , compensation to the states in areas such as health and education (R$ 25 billion) and an eventual regularization of the payments of judicial sentences that were postponed (R$ 35 billion). With these risks, the effective deficit could reach R$ 183.9 billion.

Secemski, from Barclays, warns that the accumulation of pressures on the Budget may lead the government to the need for a tax reform that results in an increase in the burden, precisely to help finance the country’s accounts and control the debt. “Debates on the different tax reform proposals will gain importance in the coming months, particularly if there are changes in relation to the initial drafts, which were originally supposed to be neutral from the point of view of the tax burden”, says the report.