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Brazil should have another 10 years of primary deficit and high risk of breaking the spending ceiling from 2025, says IFI

SÃO PAULO – Brazil is not expected to record a primary surplus over the next decade and may see its gross debt surpass the 100% mark of Gross Domestic Product by 2030 – much higher than that of other emerging countries. The assessment is made by the Independent Tax Institution (IFI), linked to the Federal Senate, which in its base scenario indicates a sequence of at least 17 years of unbalanced accounts.

According to the organ’s prospects, the general government’s gross debt should end the decade at 103.4% of GDP. The base scenario considers growth of 3.0% in 2021 – compared to 2.8% estimated in November -, 3.4% in 2022 – same level as the last report -, and 3.2% on average between 2023 and 2030.

Inflation measured by the Broad Consumer Price Index (IPCA), in the base scenario, would be 3.2% in this and the next years, and would have an average of 3.0% in the other seven years. The basic interest rate (Selic), in turn, was estimated at 2.75%, 4.25 and 5.9% in the respective periods. The data are contained in the Fiscal Monitoring Report (RAF).

In the pessimistic scenario, indebtedness could rise by more than 40 percentage points, to 135.2%. In this case, the assessment would be an economic growth of 2.4% in 2021, 1.3% in 2022 and an annual average of 1.3% from 2023 to 2030. Inflation would be 3.9% this year, 4, 0% in the following and would have an average of 4.3% by the end of the decade. The Selic rate could reach an average of 9.4% in the last seven years.

In the optimistic scenario, the gross debt could start to decline from next year and reach 74% in 2030. The respective projections for growth would be: 4.0%, 3.2% and 3.5%. And inflation, 3.2%, 3.2% and 3.0%, in the same order. The Selic could revolve around 5.9% between 2023 and 2030.

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The IFI sees greater clarity in the fiscal horizon for 2021, but draws attention to the persistence of factors of uncertainty regarding the recovery of the Brazilian economy, especially associated with the evolution of the new coronavirus pandemic in the country and the progress of the immunization program against the disease.

The institution reduced the risk of breaking the spending ceiling this year from high to moderate, after the signaling by the PEC Emergency’s rapporteur, Senator Marcio Bittar (MDB-AC), that he intends to leave the new emergency aid outside the fiscal rule – which, while maintaining a significant impact on public accounts, provides relief for the achievement of established goals. The benefit must be paid by extraordinary credit and without the need to comply with tax rules.

“The expense, which is still unknown, is going to be made without prejudice to compliance with tax rules,” says economist Felipe Salto, executive director of IFI. “What happens is that in the economy it is not enough just the accounting issue, the expense will happen”.

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The IFI estimates that the government will spend R $ 34.2 billion on the new round of benefit – that would be R $ 45 billion, but with the use of R $ 10.8 billion from Bolsa Família. In the base scenario, the program would last another four months and would have 45 million recipients. The installments would be R $ 250 – which would require supplementation in the case of Bolsa Família beneficiaries, who receive an average of R $ 190 per month.

“The government today probably has greater control over these data, due to the experience of last year, and it should probably be able to have a better capacity to forecast this expenditure for 2021”, points out the economist.

Economists are also expected to spend R $ 20 billion on vaccines and R $ 10 billion on other expenses to combat Covid-19. As in the case of emergency aid, resources would be outside the fiscal rules. The deceleration in the growth of expenses such as social security and assistance benefits also brought relief to the accounts.

“Despite the change, the situation is still quite intricate. Of course, if these R $ 34 billion of the aid were within the ceiling, the risk of disruption would be very high, it would certainly be necessary to find a way out of this. The PEC presented today copies last year’s output, which is to remove these expenses from the spending ceiling, ”says Salto.

The move made compliance with the spending ceiling in 2021 more predictable. For 2022, an election year, the high inflation recorded in the second half of last year and expected in the first months of this year should open up fiscal space for a looser government exercise. The correction of the expenditure ceiling is made based on the IPCA accumulated in 12 months counted until July of the year prior to the year.

Price dynamics mean that the risk of breaking the spending ceiling remains moderate until 2025, according to an IFI assessment. As of this year, the evolution of mandatory expenditures should generate pressure on the Budget in order to place discretionary expenditures significantly below the minimum necessary for the functioning of the public sector.

“The risk of disruption is high from 2025 onwards, as the discretionary ones can be well below what is estimated as the minimum necessary. From 2025 to 2026, we now have an expense subject to the ceiling 0.1 percentage point higher than the spending ceiling, which represents a high risk of disruption. If it were a given, we could say that it would be the breaking of the ceiling ”, points out Salto.

In other words, in order for the spending ceiling to be met, measures would be needed to precisely tackle mandatory spending. This is one of the flags of Minister Paulo Guedes (Economy) and is addressed in the Emergency PEC. The text, however, has been dehydrated over the months and now the tendency is for approval of points with a mild impact, as there is a hurry to make the new emergency aid feasible.

In Salto’s assessment, the strategy of simultaneously discussing a fiscal adjustment program with controversial instruments and the extension of emergency aid involves a complex political seam.

One of the points under discussion, the withdrawal of the Constitution from the minimum expenditures in the areas of Health and Education, for example, must face difficulties to be approved.

“Untying is a very intricate issue,” he observes.

“If we imagine that the aid is an emergency expense, it is difficult to imagine a bolder text for this medium-term fiscal adjustment, because the two things were linked”, he analyzes.


During a press conference, Salto also analyzed the effects of President Jair Bolsonaro’s recent decision (without a party) to zero federal taxes on diesel for two months in an attempt to mitigate rising fuel prices at gas stations – and thus contain the pressure of truck drivers on the government.

According to IFI calculations, the measure has a cost of R $ 3 billion to R $ 4 billion on public coffers, if it is not later extended.

“This seems little, in absolute terms, when we see the main aggregates of federal public spending, however, it is significant, because the fiscal margin is very tight and the announcements are being made without the monitoring of compensatory measures”, he says.

“The government can say that the revenue is underestimated in the LDO and that the LOA will have R $ 3 billion more in revenue and that this would offset the reduction in PIS / Cofins [sobre o diesel e o gás de cozinha]“, suggests. For the economist, greater transparency by the federal government in the indication of compensatory measures is necessary.

Despite avoiding getting to the heart of the matter, Salvo sees potential macroeconomic impacts on Bolsonaro’s recent decisions involving Petrobras.

“From the point of view of the market, from the perception of risk, which also affects the macroeconomic scenarios (ultimately, interest and exchange rates as well), a scenario of greater intervention, uncertainty and lack of transparency harms the macroeconomic scenario and will have indirectly fiscal implications, ”he says.

Last Friday (19), Bolsonaro announced the replacement of the current president of the state-owned company, Roberto Castello Branco, by General Joaquim Silva e Luna, who commanded the Itaipu plant. The move was perceived by investors as a sign of interference in the company. Petrobras’ shares accumulated a drop of more than 20% in two trading sessions and the company lost R $ 102 billion in market value.

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