Opinion – Nelson Barbosa: Gross debt and net debt

Fiscal stability is generally defined as non-explosive public debt, a stable relationship between government debt and the economy’s domestic product (GDP), but this convention leaves at least three questions open.

First, what should be the definition of government? Most studies say “general government”: Union, states and municipalities. However, due to the importance of the relationship between the Federal Treasury and the BC (Central Bank), in some issues it is worth including the monetary authority in the definition of the public sector.

Moving on to the second question, should we look at net debt or gross debt? Most analysts at Faria Lima answer “gross debt” as it corresponds to all the government’s fixed-income (interest-paying) liabilities.

However, when analyzing a company’s indebtedness, these same analysts take into account the business’ cash, that is, how much of the gross debt is covered by liquid assets, what other economists call net debt.

From an economic point of view, the most relevant criterion for the government’s solvency is its net debt, as it corresponds to the present value of the primary results expected for the future.

Translating from economics, under normal interest and growth conditions, a net debt of 61.8% of GDP (value of the general government of Brazil in December 2021) means that the market expects or demands future primary surpluses with a present value equal to 61 .8% of GDP.

Despite the fact above, several colleagues insist on saying that in Brazil things are different, that we should look at the gross liabilities of the State because here the difference between gross and net debt is very large and most government fixed income assets do not it’s liquid. Will be?

Focusing on the general government and using the IMF concept, our gross debt was 92.4% of GDP at the end of last year. The Brazilian government’s fixed income assets were therefore at 30.6% of GDP.

According to IMF estimates, also at the end of 2021, US gross and net public debt were 133.3% and 101.9% of GDP, respectively, a difference of 31.4 points from GDP. In Japan, the same numbers were 256.9% and 171.5% of GDP, that is, a difference of 85.3 points between gross and net debt. Based on these data, the difference between gross and net debt in Brazil is not a “jaboticaba”.

Moving on to the liquidity of Brazilian government investments, at the end of 2021, the Union had 20% of GDP in its single account at the BC, while governors and mayors had 1.5% of GDP in commercial banks.

There was also 1.5% of GDP invested in the BNDES, which is expected to be returned by the end of 2023. Adding these three items together, we can say that the Brazilian government had 23% of GDP invested in highly liquid fixed income assets.

Finally, on the third question, it is very difficult to say what is the optimal size of net debt, as the opinion of some analysts seems to vary according to who is in power.

For example, at the end of 2002, the net debt of the general government was 57.7% of GDP, and the traditional supporters of the toucanate thought that was all right. At the time of the parliamentary coup against Dilma, in May 2016, the same concept of debt was 41% of GDP, and the Tucana fans in the media and in the market said that the country was broke.

Whatever the opinion of the reader, you can rest assured if the next government is the PT, as PT members have a tradition of reducing the public debt they receive from their predecessors.