Brazil: ceiling-breaking PEC should raise public debt to up to 108.4% of GDP

The transition team of president-elect Luiz Inácio Lula da Silva (PT) presented a proposal to leave R$175 billion out of the Budget to fund the Brazil Aid.

The ceiling-breaking PEC (Proposed Constitutional Amendment) presented by the government of President-elect Luiz Inácio Lula da Silva (PT) should raise the public debt to 92.9% of GDP (Gross Domestic Product) by the end of the mandate, in 2026. the Selic, the basic interest rate, remains at 13.75%, the debt could reach up to 108.4% of GDP in 4 years.

The calculation is from a report by XP Investimentos published this Thursday (17 Nov 2022). The document, signed by economist Tiago Sbardelotto, considers a real growth of 2% in expenses. Today, the indebtedness is 76%.

Here is the full report (183 KB) in Brazilian Portuguese.

The draft of the ceiling-breaking PEC sent on Wednesday (Nov 16) by the transition team to congressional leaders proposes to permanently remove expenses with the Brazil Aid from the Budget.

The calculation considers a total cost of R$175 billion for payment of the benefit of R$600 and R$ 50 for families with children up to 6 years old.

There is also an extra to authorize the allocation of up to R$23 billion in excess revenue for investments, raising the total “scoop” to R$198 billion.

XP’s report highlights that, in the current proposed format, “there is no impediment to expansion beyond that amount next year”, which would open the way for a new readjustment of the waiver (license to spend outside the ceiling) in 2024.

In the most optimistic scenario, with a reduction in interest rates and expenses corrected only for inflation, XP projects an increase in public debt to 87.6% of GDP in 2026.

The document says that the increase in government spending “should affect inflation through the exchange rate and expectations channels,” forcing the Central Bank to keep the interest rate high to curb inflationary pressure. This “would generate an even steeper trajectory for public debt growth,” according to XP.

“Considering an economy growth still at 1% and the increase in expenses of the transition PEC, we expect a deficit of 1.7% next year.

Additionally, even if the additional expenditure is corrected only by inflation (which should not occur, due to the policy of raising the minimum wage), the increase in expenses in 2023 will lead to a deficit until the end of the next government’s term,” evaluates the document.

The report talks about the need for a new fiscal anchor to avoid “an increase in the cost of the public debt, interest rates and, possibly, the depreciation of the real.”

“Therefore, it is essential that the new government define as soon as possible how the fiscal expansion at this moment will be accommodated to lead public finances to a sustainable path,” concludes XP.

With information from Poder360

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