Brazil: Fiscal imbalance may cost US$84.1 billion in 2023

Brazil may face an additional bill of R$430 billion (US$84.1 billion) in 2023, the equivalent to 4.2% of its Gross Domestic Product (GDP), according to economists from the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre).

This “check” that the public coffers may have to face next year stems from the measures being adopted this year or planned for 2023 and is composed of the hole in the spending cap, revenue losses, financial costs, and other risks.

In the August edition of the FGV Ibre Macro Bulletin, economists Bráulio Borges and Manoel Pires warn that, given the size of the bill, the short-term solution seems to be a fiscal “waiver” – a temporary license for the fiscal rules to organize the budget until there is a more mature discussion about the situation of public finances.

“Talking about the fiscal challenge in 2022 is already over. Now the relevant thing is to talk about 2023,” says Silvia Matos, coordinator of the Macro Bulletin. “The impacts of the choices made throughout this year and the international shock will unfold.”

In the section on fiscal policy, Borges and Pires recall that the idea of a temporary leave has been gaining strength as a solution to Brazil’s fiscal problem, which goes beyond the spending cap.

On the side of president Jair Bolsonaro, minister Paulo Guedes has already stressed the need for a fiscal “waiver” to maintain social spending.

On the part of former president Luiz Inácio Lula da Silva, former minister Nelson Barbosa, who assists him, has suggested the hypothesis of fiscal leave at the beginning of an eventual petista government.

“Such a directive stems from the accumulation of budget problems and fiscal risks that have emerged and that amplify uncertainty,” the economists write in the Macro Bulletin.

They divide the 2023 “check” into four categories. The first is expenses not covered in the budget, which puts the spending cap in check, such as maintaining the Brazil Aid at R$600, the civil service readjustment, and the review of discretionary spending. This bill exceeds R$120 billion, about 1.2% of GDP.

Another part refers to measures with a negative impact on revenue that only affect the primary result, not the spending cap. For example, recent tax breaks and the readjustment of the Income Tax table can cost the federal government more than R$25 billion permanently.

“If we consider [also] the normalization of the collection from the oil sector, estimated at R$62 billion, the total reaches R$86 billion (more than 0.8% of GDP),” they state.

There are also events with negative financial impacts, such as the rise in interest rates and the suspension of state debt payments. Borges and Pires argue that this worsens the nominal deficit by increasing the net interest payments.

Together, these two events could have a fiscal cost of around R$77 billion or around 0.7% of GDP.

The last component is events that are still uncertain but potentially significantly impact public finances, such as the “precatórios” (court-ordered debt) and the compensation that the government must make to the states on the occasion of tax cuts, which could reach close to R$144 billion, or 1.4% of GDP.

“This is an estimate based on issues with relevant impact, which generate judicial discussion and affect the government. It is not necessarily an immediate fiscal liability or that 4.2% of the GDP will be spent,” says Manoel Pires.

With information from Valor Econômico