New fiscal rule and tax reform will help country improve public debt, says Treasury

The proposal for a new fiscal rule and the approval of the tax reform, placed as a priority for the government, will help the country to improve its debt trajectory, says the National Treasury.

The message was included by the agency in its Annual Borrowing Plan, a document that indicates the public debt management strategy for the year.

In the text, the Treasury points out that the new fiscal rule must be “marked” by the level of indebtedness. The details of the proposal are still under discussion at the Ministry of Finance, but Minister Fernando Haddad (PT) has already said that he intends to submit the issue to Congress by April.

“The proposal for a new fiscal framework guided by the level of public debt and the priority of the political agenda for the approval of a tax reform in 2023 favor the debt trajectory for the coming years and, consequently, the FPD management [dívida pública federal]”, says Treasury.

“The recent recovery of the country’s visibility before international investors who are concerned with the sustainability agenda is also relevant for debt management, given the characteristics of this base of holders”, adds the agency.

In 2023, the federal public debt should grow and be between R$ 6.4 trillion and R$ 6.8 trillion, according to the National Treasury. Last year, this indicator was BRL 5.95 trillion — slightly lower than expected (between BRL 6 trillion and BRL 6.4 trillion).

Nominal growth of up to 14.3% in the stock (after an advance of 6% in 2022) is expected at a time when the basic interest rate, the Selic, is at 13.75% per year, and the country should record new account deficit — that is, it will not collect enough to pay its expenses and will need to issue new debts to fund them.

According to the Treasury, the scenarios outlined for debt this year consider the challenges in the international environment, such as the continuation of the war in Ukraine and the increase in interest rates in the main economies.

In the domestic scenario, the projections consider a “reduction in monetary tightening from the second half”, in addition to the improvement of the country’s fiscal position through a framework of fiscal rules “that guarantees the sustainability of the public debt”.

In the first case, the Treasury projects a Selic reduction in the second semester. The market, in turn, has expressed doubts about the feasibility of a significant reduction. The main uncertainty is the country’s fiscal situation.

Regarding the new fiscal rule, the government’s expectation is that greater clarity about the future of the framework will contribute to providing more security to investors, paving the way for a reduction in interest rates.

The Budget was approved with a deficit of R$ 231.5 billion. Earlier this month, Haddad and his team announced a broad package of measures in an attempt to reverse part of the deficit and minimize fiscal risks. As shown to Sheetthe feasible impact is R$ 120 billion, in the assessment of economists.

Now, the market demands clearer guidelines on the new rule that will replace the spending ceiling, created in 2016 and which limits the advance of expenses to inflation variation.

With the debt results in 2022, the Treasury estimates that gross debt reached 73.3% of GDP (Gross Domestic Product) at the end of the year. The official data, however, will only be known after disclosure by the Central Bank.

“The level of the DBGG [dívida bruta do governo geral] is still high when compared to the average of investment-grade emerging countries, 61% of GDP, which reinforces the importance of measures to control public spending and improve tax collection”, says the Treasury.

This year, the agency has the challenge of honoring R$ 1.4 trillion in debts due in the coming months. The country, however, already has enough resources to cover more than eight months of federal debt maturities.

This gives greater comfort and security for the trading desk to slow down emissions, in case market conditions deteriorate. In a tighter cash situation, the Brazilian government would end up running the risk of paying more to finance itself.

The Treasury had BRL 1.18 trillion in its “liquidity cushion”, as this resource reserve is called, at the end of December 2022. This means that, even in an extreme scenario, in which investors do not want to buy country, Brazil would have these resources to honor its public debt commitments. The value is double what is considered the minimum security (R$ 521 billion).