Primary deficit could reach 2.60% of GDP in 2023 with increased spending, says Marcos Mendes

Depending on the size of the easing of the Spending ceiling that will be negotiated between the transition team of the new government that will take over in January 2023 and the National Congress, Brazil will have a deficit next year of more than R$ 260 billion, equivalent to 2.60% of GDP.

This primary deficit projection was presented by the Senate legislative consultant, Marcos Mendes, in a seminar held this Wednesday (23) by the National Association of Credit, Financing and Investment Institutions (Acrefi) and takes into account the waiver of more than R $200 billion presented in the so-called Transition PEC.

Mendes, who is also an associate researcher for public policies at Insper, calculated an alternative scenario, with an increase in the negotiated ceiling of R$90 billion and no exceptions for investments. In this case, the primary deficit would reach 1.29% of GDP.

In both cases, the main difference in terms of projections is related to the trajectory of the public debt, which could reach 88% of GDP in the second account and up to 103% of GDP in the higher expenditure estimate. “Which shows that the exaggeration in the definition of the increase in expenditure in 2023 can have serious consequences in the medium and long term. It may be a sign of the loss of stability of our fiscal regime”

During his presentation at the 17th SIAC, the economist pondered that if the government “is lucky”, the moment of high tax collection may offset part of the expenses. Mendes recalled that Brazil’s tax revenues are becoming increasingly associated with commodity prices and that there is a chance that the current cycle of international prices will continue.

At the Acrefi event, he showed a graph prepared by FGV/Ibre, pointing out that tax revenue associated with mineral activities, especially oil, went from an average of 0.88% of GDP between 2001 and 2020 to 2.45% of GDP in August 2022. “Oil prices we do not control, but maybe next year the price will remain high and this will ease the accounts”, he said.

He argued that this naturally will not resolve the fiscal issue, it will only make the country more dependent on a variable that it does not control. “For you to finance permanent and rigid expenses with an income that you do not control and that fluctuates, is a recipe for disaster”, he said. In this third scenario of better revenue performance, the primary deficit would be slightly greater than 0.50% of GDP.

Regarding the possibility of the new National Congress serving as a balance between the more spending intentions of the new government, the economist did not show optimism. He showed a study done together with Marcos Lisboa, his colleague at Insper, highlighting that the 277 re-elected deputies (54% of the Chamber) voted massively in favor of low fiscal responsibility projects in the past. The conclusion is that there will be resistance to more taxes and not more expenses.

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