1970-01-01 02:00:00
The fiscal adjustment promised by President Luiz Inácio Lula da Silva (PT) and his Minister Fernando Haddad (Finance) may mean a greater restriction than that observed under the spending ceiling, a fiscal rule created during the Michel Temer (MDB) and which has been the central target of PT criticism in recent years.
The picture is indicated in economic projections of the government itself. Between 2023 and 2026, the forecast is to reduce primary expenditure from 19.1% to 17.7% of GDP (Gross Domestic Product), indicates the PLDO (Budget Guidelines Bill) of 2024, drawn up by the Ministries of Finance and of Planning and sent in April to the National Congress.
There are still doubts in the market about the ability to fulfill the promised adjustment, but, if carried out, the 1.4 percentage point drop in GDP is greater than the 0.4 point reduction observed in the indicator over the same four-year horizon, between 2016 (base year of the spending cap) and 2019. In the period, spending as a proportion of GDP went from 19.9% to 19.5%.
Future estimates may fluctuate with different growth assumptions, inflation or spending pace. In a more recent report, released this month, the National Treasury forecast a drop in the ratio between expenditure and GDP from 19% this year to 18.1% at the end of Lula’s government.
Even with variations in the numbers, economists estimate that the goals outlined by Haddad may prove to be more ambitious than what was achieved under the ceiling.
If for the market this can be a positive demonstration of the rigor of the new fiscal framework, the finding could create political problems for the Minister of Finance, who every now and then is the target of friendly fire from the PT when he defends adjustment measures in the accounts.
In the diagnosis of economists, the tightening signaled by the projections is not in the design of the new spending limit – which is more flexible than the ceiling, by allowing an increase in expenses above inflation between 0.6% and 2.5% per year —but on bold fiscal targets.
Defined by the minister and presented in an interview to journalists at the end of March, they forecast a gap of up to 1% of GDP this year to a zero deficit in 2024. In 2026, the goal is to reach a surplus of 1% of GDP (something like R$ 134 billion, according to current parameters).
Since the presentation of the numbers, market agents have questioned the real capacity of the government to deliver these objectives.
Different interlocutors in the Executive recognize that the adjustment imposed by the primary targets can be tougher than publicly admitted. These people believe that the scenario could put Haddad in front of a dilemma: support the fight with sectors of the government and the party to maintain the goals or risk the credibility of the economic team by making the objectives of the fiscal policy more flexible and adhering to a slower process of rebalancing of public finances.
The first public evidence of this challenge appeared in the Report of Fiscal Projections for the 1st semesterpublished by the National Treasury.
In 87 pages, the agency listed a series of non-trivial conditions to ensure compliance with the fiscal policy target, which include boosting collection with R$ 162.4 billion in permanent revenues, contingency between R$ 56 billion and R$ 76 billion a year and tinker with bonds that, from 2024 onwards, will result in accelerated growth in health and education expenses — flattening out the other areas.
The need to block expenditures in order to respect the target is precisely one of the possible causes for the drop in the expenditure/GDP ratio over the years, despite the permission in the framework for real growth in expenditures. This means that the government will have space under the limit, but will not be able to spend to avoid non-compliance with the objectives set. Blockages should fall on costing expenses and part of the investments.
“Who is dictating the speed of the adjustment is Haddad’s goal, who wants to move from a deficit of 1.3% of GDP this year, in our estimates, to a surplus of 1% in 2026. This gives an adjustment of 2, 3% of GDP in four years”, says economist Manoel Pires, coordinator of FGV Ibre’s Fiscal Policy Observatory. According to him, even former finance minister Henrique Meirelles, one of the creators of the ceiling, promised in practice a smaller adjustment.
“The goals that Haddad is defending are ambitious, it is a very challenging fiscal program”, says Pires. For him, although the government has had important victories in the search for new revenues, there is a risk of frustration in the results.
“The new fiscal framework has the same issue with the spending ceiling, which promised all the adjustments on the expenditure side and generated a certain amount of fatigue. The framework promises all the adjustments on the revenue side, and this could also generate adjustment fatigue” , alert.
The advantage of the new rule is that exceeding the target automatically triggers cost containment measures. In addition, the fiscal policy objectives are once again recorded in the LDO, which is simpler to change if the government so prefers. In the case of the spending ceiling, as it was a constitutional norm, there was a succession of PECs (proposed amendments to the Constitution) to adjust the limit whenever there was bottlenecking of policies and resistance to cuts in other areas.
Economist Julia Braga, coordinator of Monitoring and Studies of the Economic Conjuncture at Ipea (Institute of Economic and Applied Research), assesses that the scope of the numbers projected by the government has a recessive bias, since the reduction in public spending would hardly be fulfilled in the same magnitude by the private sector.
“When we look at the breakdown of fiscal variables, total expenditure grows 3% in real terms in 2024 compared to 2023, but only 0.3% in 2025 and 0.1% in 2026. It is a very low growth rate, almost as if it had the same rule as the spending cap”, he says.
According to her, the primary stipulated by Haddad is “very ambitious” not only because it requires a strong inflow of revenues, but also because it imposes the risk of contingencies.
“We went through an experience similar to the spending cap, which reached a point of near shutdown [apagão]. I think it’s very dangerous and risky to set such an ambitious target, because there is a potentially high economic and social cost,” he says.
For comparison purposes, the projection of an expenditure of 17.7% of GDP goes back to a level similar to that recorded in the 2023 Budget proposal (17.6% of GDP), sent by the government of Jair Bolsonaro (PL) with a series of cuts in social policies.
According to Julia Braga, greater gradualism in the adjustment process would be “more interesting”. She also defends changes in the parameters of the fiscal framework, to keep spending fixed in relation to GDP and allow for real growth in spending in a proportion greater than 70% of the increase in revenues, as foreseen in the current text.
The Secretary for Economic Policy at the Ministry of Finance, Guilherme Mello, tells Folha that the projection models indicate scenarios that are sometimes taken “too literally”. He cites the example of public debt, an indicator that depends on the results of the accounts, but also on the pace of GDP growth and interest rates.
“These are quite uncertain variables, right? So, when we build these projections, they are subject to a lot of rain and thunderstorms, not least because the models have a lot of difficulty capturing the dynamic feedback mechanisms. The country will grow more. If it grows more , then spending as a proportion of GDP will fall, because the denominator grows. But at the same time it will be much easier for you to fulfill the primary”, he says.
In Mello’s assessment, the framework maintains the pace of spending growth at up to 2.5%, in line with the potential growth of the country’s economic activity.
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