How serious is Brazil’s fiscal situation? The subject has practically become the topic of bar talk. There are many versions that circulate on social media, at financial market tables and even in conversations between passengers and Uber drivers.
Some visions border on the apocalyptic. On this side, there are those widespread in many circles in Faria Lima. In the end of the world scenario, the country is heading towards the abyss and will enter a new lost decade.
At the other extreme, the narrative presented by the government appears. In it, the country is going from strength to strength and there is no problem in continually increasing spending. This is because the expenses will be easily offset by the growth in revenue and the reduction of inefficiencies in contracted expenses.
One of the most vocal critics of the government’s wasteful stance has been the SPX, Rogério Xavier. The manager mentioned, in a recent event, that there was a series of parafiscal expenses, that is, outside the calculations for the primary result target, which are close to R$100 billion or around 0.86% of GDP.
READ MORE: Government debt creates opportunities in fixed income; private bonds already pay IPCA+9%
Creative accounting
If true, the number would mean that the true hole in public accounts could be up to four times greater than what the official accounts reveal. Within the fiscal framework, the government committed to maintaining public accounts this year within a range that goes from a deficit of 0.25% of GDP or R$28.8 billion to a surplus of 0.25% of GDP, which would be a positive result of R$28.8 billion.
The primary fiscal result account basically considers revenues minus expenses, but without accounting for the amount allocated to paying interest on public debt. It will be a primary surplus if the result is positive or a primary deficit if the mathematical sign is minus.
So with an official deficit of 0.25% plus government spending outside the framework, the real bill would be a fiscal hole of more than 1.1% of GDP for 2024. That’s if the government manages to stay within the target.
READ MORE: Rising interest rates, falling inflation: the best time to save money
Xavier’s vision has a fanatical following, but it is far from consensual. Several considerations can be made about the assumptions used in these accounts. There is another trend in the market that understands that, if the government tends to exaggerate its optimism, critics also seem to be weighing the zeros on the calculator.
There are those who see a middle ground. It would be R$33.6 billion outside the framework and not R$100 billion, according to calculations made by the chief economist at Warren Investimentos and former executive director of the Independent Fiscal Institution (IFI), Felipe Salto.
The expert highlighted that “it is not simple” to calculate what would be a parafiscal expense, that is, outside the general budget and not included in the calculation of the primary result. “I do not agree that the risk of excesses in terms of effects on debt resulting from off-budget measures has increased.”
READ MORE: Why the improvement of Brazil’s rating by Moody’s could be a problem
The moment of truth will be in 2025
One of the expenses frequently cited as an example of expenditure outside the framework is the program sock footextra income intended for public high school students. Salto, however, believes there is some exaggeration in this interpretation. “There is nothing relevant so far (in Pé de Meia).”
The deficit or surplus target for 2024 would be close to being achieved in Warren Investimentos’ projections. A cut or contingency of R$4.5 billion in expenses would be enough for the government to remain at the bottom of the primary result target range this year, that is, a deficit of R$28.8 billion.
Far from corroborating the government’s optimistic thesis, Salto emphasizes that the acid test will take place in 2025. The house predicts the need for the government to make a cut of R$46.6 billion to meet the minimum target. This takes into account the exclusion of R$44 billion in expenses from the framework calculation.
In Warren’s calculations, the government will have a primary deficit of 0.83% of GDP, or R$104.3 billion, in 2025. The value is more than 2.5 times higher than the deficit foreseen in the Guidelines bill Budgets for next year.
The difference, in Warren’s view, is that the government sounds too optimistic about revenue in 2025. Salto explains that the government appears to have R$67.4 billion in net revenue more than it will achieve, according to the house’s calculations. of analysis.
Debt could flirt with 100% of GDP
In the scenario projected by Warren for the coming years, gross debt in relation to GDP will jump to 94.9% in 2033. The concept of gross debt considers all obligations owed by federal, state and municipal governments. This indicator closed 2023 at 74.4% of GDP.
The average debt of emerging countries with the same sovereign rating as Brazil, to have a basis for comparison, is 55% of GDP.
The predicted situation could change, of course. “What is urgently needed is to discuss budget reform”, says Salto. One solution would be to unlink revenues. This means removing the stamp of funds from the budget provided for in the legislation.
In the Senate’s calculations, 90% of government spending is mandatory, that is, it is already directed by law. The percentage has increased year after year and could reach 93.3% of the entire budget in 2028.
Until reform takes place, the gap will continue to increase. The risk is that the half-empty glass will dry up once and for all.
