Counting on Luck
With the so-called New Fiscal Framework, the government hoped to gain credibility regarding the performance of public accounts through a promise to generate a dynamic of expenditures versus revenues consistent with stabilization of the federal debt. However, the fragility of its bases was evident, given that it guaranteed higher spending without any counterpart assurance of greater revenues.
The lack of credibility, present from the start, is now intensifying, as demonstrated by the change in the primary result targets from 2025 onwards, as presented in the bill for the new Budget Directives Law (PLDO). Furthermore, our forecasts (deficits of 0.7% of GDP in 2024 and 0.6% in 2025, not counting judicial credit warrants - precatórios) indicate the government’s targets will not be met.
Strong revenues performance early in the year were a positive surprise, but proceeds for the remainder of the year will likely fall short of the required to produce a zero primary balance. The administration counts on good results from the measures to boost revenue this year, but these gains are uncertain because they depend on congressional action and are subject to judicialization.
Moreover, a variety of fiscal risks are looming, such as salary hikes for federal civil servants, payment of two years of salary bonuses (in conformity with a decision by the Federal Audit Tribunal - TCU), the proposed constitutional amendment involving pay raises every five years for an expanding list of civil servants (PEC do Quinquênio), the precatórios from lawsuits by companies in the sugar-alcohol sector, and, besides primary expenditures, the outcome of yet a new round of states’ debt renegotiation. In addition to these risks, the projections for government spending in the PLDO contain rubrics that are underestimated and rife with basic inconsistencies.
Finally, even if the government were to achieve its postulated primary result targets, this would not be enough to stabilize the debt when considering reasonable parameters for interest rates and GDP growth. With the current fiscal policy, characterized by unsustainable public spending paths and difficulty of increasing revenues, the risk premiums will continue facing upward pressures.
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