Total revenues, which include transfers, fell in the first 10 months of 2023 compared with the same period in 2022
01/16/2024
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Renata dos Santos — Foto: Ricardo Ledo/Valor
Even with the gain considered exceptional in 2021 and part of 2022, states’ revenue fell last year not only compared to the previous year but also to 2019, the period before the Covid-19 pandemic and also the first year of the previous governors’ terms.
From January to October 2023, the latest data available, revenues from taxes, fees, and contributions from the total of 26 states and the Federal District amounted to R$553.45 billion, 6.7% lower in real terms than in 2022 and 3.4% lower than in 2019. Although still 11.3% higher in real terms than in 2019, aggregate current revenue for 2023, which totaled R$954.9 billion, also deteriorated compared to 2022, with a decline of 3.1%. Aggregate revenues include transfers that states receive from the federal government.
As revenues fell, current expenditures increased by 3.9% in real terms in 2023 compared to the previous year, also from January to October. Personnel costs, which account for 58% of state governments’ current expenditures, rose by 5.2%.
The data up to October show the outlook before the advance payment in 2023 of the compensation for sales tax ICMS losses, which will not be paid by the federal government to states and municipalities until 2024. These funds were transferred to regional governments in November and December and helped improve the outlook at the end of 2023, according to representatives of state governments.
The data on realized revenues and liquidated expenses were collected by Valor from the fiscal reports submitted by the states to the National Treasury Secretariat. The figures for 2019 and 2022 were updated by the benchmark inflation index IPCA to October 2023.
For Gabriel Leal de Barros, economist and partner at Ryo Asset, the outlook shows that concerns about the states’ fiscal adjustment are back on the radar. The issue was sidelined during the pandemic and then, with the positive commodity shocks, in 2021 and part of 2022. “The issue of the states’ revenue base is back on the table,” he said.
According to the data, the drop in own revenue from January to October 2023 compared to the same period of the previous year occurred in 11 of the 27 entities. The drop in current income affected 16 of them. What is striking, says Mr. Leal de Barros, is the drop in revenue in the southeastern states, because they were hit hard by the ICMS cut imposed on the states in 2022. States with significant relative tax revenues, such as São Paulo and Minas Gerais, did not increase the standard tax rate, as did most of the Northeastern states. In these states, own revenues are more representative in the composition of revenues. According to the survey, current revenues in São Paulo and Minas Gerais fell by 7.3% and 3.4%, respectively, in real terms, from January to October compared to the same period in 2022.
The data collected shows that the Northeastern states’ revenue was stable in real terms compared to 2022, and the decrease in current revenue was only 0.7%. In the Central-West, own-source revenue was also virtually stable, with a 0.1% increase in real terms and a 2.2% decrease in current revenue. The North experienced a 7% increase in its revenue and a 2% increase in current revenue.
The largest losses were in the Southeast, which saw a 12.7 percent drop in own resources and a 6.7% drop in current resources. No state in the region raised the modal ICMS rate in 2023. In the South, the loss was 1.8% in own revenue, but there was a 1.4% increase in current revenue. Among the southern states, only Paraná increased the standard ICMS rate to 19% in 2023, up from 18% in 2022. At the end of last year, the state passed a law to raise it again in 2024, to 19.5%. At the end of 2023, the Rio Grande do Sul government even proposed to increase the rate from 17% to 19.5% in 2024, but the project was withdrawn due to difficulties in getting it approved by the state legislative assembly.
The figures show that the increase in the modal tax rate by the states was not enough to compensate for the loss of revenue from the aggregate, said Mr. Leal de Barros of Ryo Asset. The states that increased the tax rate, he explains, are less representative when looking at the overall fiscal picture of state entities. Data from the reports show that the four southeastern states account for 52.5% of the total revenue of the five regions and 45.2% of the current revenue.
The move to increase the modal tax rate came in response to supplementary laws 192/2022 and 194/2022. Approved in 2022, amid the presidential election campaign, the two laws imposed changes that resulted in rate reductions and changes to the ICMS calculation base in the telecommunications, electricity, and fuel sectors, considered the “blue chips” of tax collection.
The states’ loss of revenue was challenged in court and resulted in an agreement for the federal government to compensate states and municipalities for their loss of the tax, as 25% of the ICMS revenue is transferred by the state government to the respective municipalities. The agreement set a schedule for payments in 2023 and 2024 and in some cases 2025. Last year, however, the federal government made the scheduled transfer and also front-loaded the payments to be made in 2024. The advance payments were made in November and December.
According to Mr. Leal de Barros, the revenue from the compensations probably contributed to the state’s accounts being in the black in 2023. However, the revenue was temporary and 2024 is expected to be a year of economic slowdown, with a major fiscal challenge for the federal government.
The final text of the tax reform, the economist pointed out, had no provision that considered the average ICMS revenue from 2024 to 2028 as part of the criteria for distributing the future tax on goods and services (IBS), the new tax created by the reform and which will be collected by the states and municipalities. “The debate on how to compensate for the loss of the ICMS tax base will probably be part of the discussions on the tax reform regulations.”
The Rio Grande do Sul government said that the ICMS reduction imposed in 2022 continues to have an impact on its revenues, and to maintain regular payments and investments and overcome accumulated liabilities, the state needs to restore revenue levels. Part of the losses have been compensated, the state government said in a statement, but still not enough to restore the previous situation. The government has proposed “a review of tax benefits that will be implemented with caution to guarantee and maintain the competitiveness of the state, combining it with the need to seek a model of sustainability in the short, medium, and long term, especially in light of the changes in the tax reform,” the note said.
From January to October 2023, the state’s revenue fell by 2.4% compared to the same period in 2022, but with a 3.9% increase in current revenue and a 5.1% increase in current expenditure. The state government said that the data for 2023 are still being finalized, but Rio Grande do Sul maintains its budget surplus as a result of management measures, privatization, and the effects of the so-called Fiscal Recovery Regime, a mechanism created in 2017 to provide tools for struggling states to adjust their accounts.
Alagoas is among the states with an increase in revenue in 2023. The state’s revenue increased by 8.1% from January to October 2023 compared to the same months of the previous year. Current revenues increased by 3.2%. Renata dos Santos, Finance Secretary of Alagoas, said that the state’s revenue will end 2023 with a real growth between 10% and 12%. She said that a special ICMS installment plan also contributed to this revenue at the end of the year. The recovery, she said, was also helped by the increase in the modal ICMS rate to 19% in 2023 from 17%, along with changes in the state’s tax collection structure. The state’s tax revenue was favored in 2023 by the real increase in the minimum wage and the cash-transfer program Bolsa Família, which benefited a significant part of the Alagoas population and “turned into consumption.”
For 2024, she said, the idea is “to begin in balance,” and that’s why the state is already taking measures to contain current expenditures “to mitigate the pressure that may come from the municipal elections.” Revenues are expected to grow by 2% in real terms this year compared to 2023, while expenditures will remain at the same level in nominal terms.
In Pará, revenues also increased by 13.8% and current revenues by 3.5%. According to the state’s secretary of Finance, René Sousa Júnior, this reflects the increase in the modal ICMS rate from 17% to 19% in 2023 and the good performance of the mining sector, which does not generate tax revenue from exports but brings dynamism to local activity. Driven by hikes such as the teachers’ salary floor, the state’s personnel costs accelerated, rising by 11.9% in 2023 compared to 2022. Current expenditure increased by 9.8% from January to October. According to the secretary, the accounts were adjusted in 2023, with an important contribution from the compensation of ICMS losses by the federal government. According to Mr. Sousa Júnior, the state received a total of R$600 million in compensation in 2023, of which approximately R$200 million was related to the year itself.
*Por Marta Watanabe — São Paulo
Source: Valor International