A cost-cutting of R$11.2 billion was due to increased spending, and the spending freeze of R$3.8 billion was related to revenue frustration
07/19/2024
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Fernando Haddad — Foto: Rovena Rosa/Agência Brasil
Finance Minister Fernando Haddad announced on Thursday the freezing of R$15 billion from this year’s budget as a way of complying with the rules of the fiscal framework.
“It’s a cost-cutting of R$11.2 billion and a spending freeze of R$3.8 billion, due to revenue,” said Mr. Haddad. The decision aims to keep the primary deficit between zero and 0.25% of GDP in 2024, in a context of lower-than-expected extra revenue and higher than expected increases in compulsory spending.
On Monday, the figures will be detailed in the Revenue and Expenditure Assessment Report for the third quarter. “[The deficit] is within the range between zero and 0.25%. It will be close to the ceiling of the range in this report,” said Mr. Haddad.
According to him, the spending freeze of R$3.8 billion could be re-evaluated if the discussion on tax compensations progresses in the Senate. “Spending freeze can be reviewed. Cost-cutting is more difficult,” added Planning Minister Simone Tebet.
The meeting aimed to seek mediation from President Lula for two currents within the government: the one that defends the expansion of spending—and wanted a freeze of between R$10 billion and R$16 billion at most—and the economic team, which was studying a greater restriction. Asked if President Lula had been convinced of the need for the cut, Minister Haddad said that “if he was making the announcement, it’s because Lula had been convinced”.
The containment of R$15 billion in discretionary (non-compulsory) spending was generally well assessed by experts, as it came in above the R$10 billion floor suggested by financial market participants. The amount, however, is still considered insufficient to bring the fiscal deficit to zero.
“The announcement is very positive and comes very close to our forecast, R$16 billion,” said Felipe Salto, chief economist at Warren Investimentos and former Secretary of Finance of the State of São Paulo.
Cost-cutting and spending freeze are two types of temporary spending restrictions, which comply with different rules in the new fiscal framework. Cost-cutting occurs when government spending increases by more than 70% of the growth in revenue above inflation. The spending freeze occurs when there is a lack of revenue that jeopardizes compliance with the primary result target.
According to Mr. Haddad, the report to be released on Monday will detail these figures and will indicate a fiscal deficit between zero and 0.25% of GDP, the tolerance range of the framework.
“It’s within the range, between zero and 0.25% [of GDP]. Remembering that in this exercise that the Federal Revenue Service did, it is not considering at this time the effects of the compensation provided for by the Federal Supreme Court decision. It’s going to be close to the ceiling of the range in this report,” said Mr. Haddad, referring to the Court’s decision to postpone the deadline for the agreement between the government and Congress on compensation for the payroll tax exemption for labor-intensive sectors, defended by companies and trade unionists.
For next year, the government continues to foresee cuts of R$25.9 billion in the budget proposal, said Mr. Haddad.
The announcement was generally well received by economists, as it came in above the R$10 billion suggested by market agents. The amount, however, is still considered insufficient to guarantee compliance with the zero primary result target this year.
The cost-cutting of R$11.2 billion in non-mandatory spending “was a positive move, which is expected to reduce the fiscal risk of non-compliance with the spending limit,” said Tiago Sbardelotto, an economist with XP. “In our assessment, a cost-cutting of R$16 billion [for the year] would be necessary, and an important part of this amount will be made now, which makes smaller additional adjustments less costly,” he said.
On the other hand, the spending freeze of R$3.8 billion still seems insufficient to Mr. Sbardelotto. “To reach the target, taking a damming up into account, we see the need for a bigger cut, of R$25.5 billion,” he said.
When revenue performance is weaker than expected, the government can compensate by freezing discretionary spending. If the total expenditure estimate exceeds the amount allowed by the fiscal rule because of excessive growth in compulsory spending, the government blocks discretionary spending.
“The cost-cutting is a change in the composition of spending, a zero-sum game between mandatory and discretionary items. Spending freeze, on the other hand, all else being equal, results in a decrease in total spending,” said Roberto Secemski, chief economist for Brazil at Barclays. In the end, both measures imply cuts in non-compulsory spending, but a spending freeze is what really affects the primary result.
The government’s announcement shows an adjustment of R$15 billion. Gabriel Leal de Barros, chief economist at ARX Investimentos, was expecting a higher figure, of R$19.5 billion. For him, the composition of what was released indicates that little was changed in the revenue line.
“The market is expected to be positive [in its reaction] on the margin, but it is far from solving the problem, because there is considerable uncertainty as to whether the government will achieve this volume of revenue,” he said.
With the cutting of R$11.2 billion, the adjustment seems to have been made more on the spending side, says Mr. Leal. His suspicion is that the main vector was the upward reassessment of mandatory spending on social security and social assistance, two items that were growing a lot, according to him.
The government’s announcement came closer to Warren Investimentos’ forecast of a R$16 billion freeze and was considered “quite positive” by chief economist Felipe Salto. In his assessment, it was a sign that the government wants to fulfill its promise to meet the targets set out in the new fiscal framework.
Warren estimates that this will require a cut of R$26.8 billion in discretionary spending this year. With the containment of R$15 billion, that leaves R$11.8 billion to be frozen, which could still happen in the next editions of the bimonthly evaluation report, in September and November.
Ana Paula Vescovi, Santander’s chief economist and former Secretary of the Treasury, also said in a comment that “explicitly, the government did not aim for the center of the primary result target”. Santander projected an adjustment of R$15 billion in its July assessment.
Economists say they need to wait until the July report is released on July 22 to understand which mandatory expenses have been revised upwards and which revenues have been revised downwards.
Doubts regarding the government’s commitment to the fiscal targets set for 2024 once again caused a sharp deterioration in local financial assets on Thursday.
While the amount of resources that will be frozen this year to achieve the zero deficit was not known, the exchange rate rose sharply, and once again the real depreciated to R$5.58 for one dollar, while future interest rates rose sharply.
At the end of the day, however, Mr. Haddad announced that the government would freeze R$15 billion in spending, which brought some relief to the markets—a move that players believe could extend into Friday’s session.
The Brazilian real ended the day down sharply against the dollar. The exchange rate rose 1.89% in the spot segment, trading at R$5.5872 for one dollar and at R$6.0889 for one euro.
After the announcement, however, the futures for August moved away from the day’s high and closed up 1.13% at R$5.56.
A similar dynamic was observed in interest rate futures, which shot up along the entire curve during the trading session, but moved away from the day’s highest levels after the government signaled that it was trying to meet the targets of the framework.
The interbank deposit rate (CDI) for January 2026 jumped to 11.31% from 11.185%, but closed below the 11.40% mark it was trading at before the government’s announcement.
The Ibovespa, already closed during the announcement, fell 1.39% to 127,652 points.
*Por Renan Truffi, Fabio Murakawal Julia Lindner, Anaïs Fernandes, Marcelo Osakabe, Ívina Garcia, Gabriel Roca, Gabriel Caldeira, Victor Rezende — Brasília, São Paulo
Source: Valor International