Last Tuesday (7), André Lara Resende published an article in Valor Econômico under the title “The fiscal precipice and reality”, in which he argues that there is no serious fiscal problem in Brazil. The financial market would be exaggerating to keep interest rates high and, with that, “reward rentiers”.
His first argument is that last year’s fiscal numbers were very good: a surplus of 1.3% of GDP and a drop in the gross public debt. He ignores, however, that the factors that led to the surplus in 2022 will hardly be present in 2023.
In the Federal Government, gross revenue for 2022 grew by R$ 208 billion compared to 2021. The main gain was in the sum of Income Tax and CSLL (R$ 137 billion), thanks to the good performance of the GDP (around 3 %) and the high profits of companies linked to the export of commodities.
In 2023, GDP growth will be less than 1%. And we can’t predict anything about commodity prices, as we don’t influence them. Therefore, we are dependent on a risk factor that we do not control and which also led to the good performance of revenue from the exploration of natural resources (growth of R$ 30 billion).
Another source of revenue growth (R$40 billion) was the payment of dividends and shareholdings by state-owned companies to the Treasury. This will not be repeated either, as the new government has announced that it will reduce the payment of dividends to increase investments by state-owned companies.
On the other hand, tax exemptions for fuel and the IPI reduced other revenues by R$ 68 billion. The new government does not seem willing to revoke them.
On the expenditure side, the items that contributed to the 2022 surplus were the minimum wage readjustment without a real increase and the non-granting of readjustments to civil servants. The new government has already established that it will give a real increase to the minimum wage and to civil servants, affecting the trajectory of spending several years ahead. On top of all this came two PECs (nursing transition and floor) and an overestimate of the ceiling correction that added R$ 200 billion to primary expenditure.
The package announced by the Ministry of Finance is insufficient to curb fiscal deterioration, as I argued in previous column.
Lara Resende ignores this change in scenario and continues with her second argument: “Brazil’s public debt is not high. It is much lower than that of developed countries and in line with developing countries”.
Now, developed countries can take on more debt at lower interest rates because they have convertible currency and lower and less volatile inflation than emerging countries, in addition to a low history of debt default. In relation to developing countries, contrary to what you say, we are well above average. Our gross debt according to the IMF criteria is 88.2% against an average of 65.1%.
Then there is the traditional argument that public debt is not a problem when the country owes in its own currency. It ignores that debt defaults or its inflationary erosion are a real risk for Brazilian and foreign savers.
It also states that long-term rates are set by the market based on the projection of the short-term rate (Selic) defined by the Central Bank. This is incorrect. Every time the BC pulled the short-term interest rate (Selic) down excessively, long-term interest rates did not follow or even rose, because what determines them is the risk of inflation and default. The BC does not control this.
Lara Resende suggests that “if it wanted to, the BC could fix the entire term structure of debt rates (…) and put an end to alarmist pressures”. This would be equivalent to setting interest rates on government bonds below market rates. Anyone with money to invest would do so in private assets or abroad. It would not take long for the government to react, with measures of compulsory investment in government bonds. Then came capital flight, currency devaluation and inflation.
On Thursday (9) we already had an appetizer: the Treasury suspended the trading of securities due to the sharp rise in future interest rates, in reaction to the president’s speeches.
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