2025 target requires additional effort of 1% of GDP – 04/01/2024 – Market

2025 target requires additional effort of 1% of GDP – 04/01/2024 – Market
2025 target requires additional effort of 1% of GDP – 04/01/2024 – Market

The revenue measures already implemented so far by the government of Luiz Inácio Lula da Silva (PT) will be insufficient to guarantee the achievement of the fiscal target sought by Minister Fernando Haddad (Finance) in 2025.

The National Treasury estimated in its fiscal projection report the need for an additional effort equivalent to 1% of GDP (Gross Domestic Product) to reach the surplus of 0.5% of GDP promised for next year.

This would mean an extra revenue of R$ 123.9 billion, considering the projection of the SPE (Secretariat of Economic Policy) for the nominal GDP of 2025. If the value is not reached, part of the effort could be fulfilled through the freezing of expenses (via contingency).

Without new measures, the Treasury projects a deficit of 0.5% of GDP next year, a scenario that would go against the economic team’s desire to show a gradual and continuous improvement in public accounts.

For this year, the central target is zero deficit, and the most recent Budget assessment indicates a negative result of 0.1% of GDP — within the tolerance margin of the fiscal target, which is 0.25 percentage points more or less.

The main explanation for the hole in the 2025 accounts comes from the nature of the revenue measures approved so far. Most of them are based on an extraordinary source of resources, short-lived and with no guarantee of sustainability for the following years.

The taxation of the stock of funds in tax havens (offshore) and the super-rich fits into this profile. Once the tax on past income is collected, which will occur in 2024, the government will only rely on the future flow of these revenues — in a much smaller volume than the R$19 billion projected for this year.

Other extraordinary revenues will come from the transfer of Caixa’s judicial deposits that were unduly repressed by the bank, the renegotiation of railway contracts and part of the tax agreements to resolve disputes in Carf (Administrative Council of Tax Appeals).

The Treasury’s diagnosis is a snapshot of public accounts considering current legislation. This does not mean that the government will not use other initiatives to continue increasing revenue, including new extraordinary revenues. If economic activity improves, this could also help fill the gap.

The report, however, serves as a kind of warning to the government itself that maintaining fiscal improvements requires more efforts.

The Minister of Finance has already signaled that the problem is on the team’s radar. In an interview with CNN Brasil last Tuesday (26), Haddad said that reaching a surplus of 0.5% of GDP next year will depend on the National Congress.

“At the request of the President [do Senado, Rodrigo] Pacheco [PSD-MG] and the president [da Câmara, Arthur] Lira [PP-AL], bills were presented to arrive at an equation. This will define the future of the trajectory [das contas]. What I’m trying to say is that, over the next few days, we will define with the National Congress the direction of the carriage, how we will define the trajectory from now on”, he said at the time.

The objective of reaching a surplus of 0.5% of GDP in 2025 was indicated together with the presentation of the new fiscal framework, in March last year. This target will still need to be confirmed by the government when sending the PLDO (Budget Guidelines Bill) for 2025, which will take place on April 15th.

The project is finalized at a time when the government is discussing the outcome of collection measures sent to the Legislature at the end of 2023, such as the reinstatement of the payroll of companies and city halls, the end of Perse (Emergency Program for the Resumption of the Events Sector ) and limiting the use of judicial credits by companies to reduce taxes.

The Treasury has already needed to open negotiations and make many of these measures more flexible to improve their acceptance in Congress, which tends to impact their contribution to rebalancing public accounts.

Economist Manoel Pires, coordinator of the Fiscal Policy Observatory at FGV Ibre (Brazilian Institute of Economics at Fundação Getulio Vargas), assesses that the window for the government to be able to approve measures in the National Congress is closing.

He recalls that the initiatives that are reinforcing revenue in 2024 — and which should contribute to a better result than the deficit of 2.1% of GDP in 2023 — were approved in the second half of last year.

“The scenario for next year in this aspect is a little difficult. In the second half there is an election [municipal]and Congress has different productivity and greater sensitivity to certain issues”, he states.

Pires cites another obstacle for the government to move forward with more fundraising measures: the fatigue of the agenda itself. “Congress is also getting tired of these measures and is having a different perspective on the advisability of approving them.”

From an economic point of view, there is also growing concern about the pace of economic activity. So far, according to the expert, the adjustment strategy has focused on closing loopholes in the law, which tends to have little or no negative impact on GDP.

“The question is to know to what extent these measures will be available to fulfill all this effort. This issue will become even more latent. The government is closing all possible drains. When the drains run out and there is still a lack of money, this could be an issue” , says Pires.

In the report, the Treasury also highlights that the need for additional efforts tends to continue in the following years, given the real growth in expenses authorized by the new fiscal framework.

In 2026, the fiscal effort would need to be 1.3% of GDP to achieve Haddad’s objective, which is to reach the last year of the government’s term with a surplus equivalent to 1% of GDP.

For the following years, the Treasury calculated the necessary adjustment to keep public debt stable. Even so, the future government would need to take measures in an amount equivalent to 0.7% of GDP in 2027 and 0.2% of GDP in 2028.

The increase in revenues, however, has the side effect of faster growth in expenses linked to revenue, such as the Health and Education floors and reserves for individual and bench parliamentary amendments.

In other words, by solving the problem of the fiscal target, the government takes on another challenge: that of preventing these mandatory expenses from taking up all the space available for funding and investments.

The fiscal projection report was published by the Treasury almost three months late. Biannual, it should have been released in December, but was postponed to incorporate the collection measures for 2024 approved in the final stretch of the legislative year.

Its content has also been adapted. In the July 2023 edition, under a different scenario and without several of the fundraising measures approved in Congress, the document pointed to a dramatic picture, with contingencies estimated at R$56.5 billion this year and R$63.9 billion in 2025 for meet Haddad’s goals.

In the current version, the report does not calculate the size of the blockade and says that the fiscal effort can be achieved “from a combination of several measures”. “The contingency could contribute 0.3 pp of GDP to the fiscal effort necessary to meet the primary result targets”, says the document.

The article is in Portuguese

Tags: target requires additional effort GDP Market



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