Opinion – Marcos Mendes: Do you have money left in the Treasury?

The federal government’s revenue has been breaking records, and this leads politicians to think there is money left over. Nothing could be more misleading.

The Ministry of Economy forecasts a deficit of BRL 67 billion (0.7% of GDP) in 2022. For public debt to stop rising, we need, in a very optimistic scenario, a surplus of at least , 1.5% of GDP. This means a fiscal adjustment of at least 2.2 percentage points of GDP (1.5+0.7) or R$212 billion.

This adjustment is necessary, although not sufficient, for the economy to have a chance to grow again.

Political decisions, however, go in the opposite direction. The tax reductions already implemented have an annual cost of approximately R$ 40 billion. There are proposals to increase spending with a high probability of approval that, in a conservative account, add up to R$ 30 billion per year, which does not include the cost of the eventual creation of a fuel price stabilization fund, approved in the Senate, but locked in the Chamber. If approved, this fund will be an open, high-cost account, as I argued in a previous column.

The dissonance between the fragile fiscal situation and the feeling of money left over stems from the rise in commodity prices, with which federal tax revenue is strongly correlated.

When the prices of commodities exported by Brazil rise, companies linked to the sector profit, paying more taxes, royalties and, in the case of state-owned companies, dividends. There is also an inflationary impact, due to the increase in the price of those goods in the domestic market, which is quickly transferred to government revenue.

Revenue data for the 12 months ended in January show that, among the economic sectors that most increased tax payments, those linked to commodity exports predominate: metallic minerals (261% increase), oil and gas (193%), agriculture (100%). The average increase in collection was 22%.

In a report released on Tuesday (22), the Ministry of Economy shows that, in comparison with the amounts included in the Budget, the expectation of collection with royalties, dividends and signature bonuses linked to the oil industry increased by 50%, representing R$ 60 billion more.

This is the typical increase in revenue that is out of the government’s control. If the price of commodities plummets on the international market, tax revenue will fall with it. If we use this temporary revenue gain to provide lasting tax breaks and spending increases, when the tide in commodities turns, our delicate fiscal situation will worsen even further.

This is what happened between 2004 and 2012: there was a long positive cycle of commodity prices, and the government expanded expenditures and tax benefits. With the fall in the prices of our exports, the collection fell, but the expenses remained high and the tax benefits were perpetuated. A large primary deficit opened, Brazil lost its investment grade, and we entered the 2014 recession.

We seem to be heading in the same direction again. What has held back the expansion of expenses is the spending ceiling. Although hurt by the many easing of the rule, he is still able to hold a lot of pressure.

On the other hand, the capture of the Budget and the political coordination of the government by the centrão, added to the president’s electoral pretensions, and the infiltration of private interests in the ministries have created space for all kinds of parochial and populist spending and fiscal benefits. Presidential vetoes to laws that propose more spending fall like flies, daily trampling the Fiscal Responsibility Law.

This suggests new pressures against the ceiling. If there are new easings, or even their revocation by a new president, simultaneously with a fall in commodity prices, the fiscal deterioration will accentuate.

​A new fiscal crisis, in a context of an economy that has not grown for years, compromised governance, captured budget and political polarization, puts the risk of institutional crisis on the radar.