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The combination of higher revenue flow, driven by surprising growth in tax collection, cash availability and rising interest rates raised the income from financial investments by states and municipalities in the most recent period. These revenues totaled R$17.7 billion considering states and state capitals in the 12 months through February. This is more than two times, in real terms, the amount seen in the previous period – R$7.8 billion. In relation to the 12-month period through February 2020, the pre-pandemic period, the real increase is 25%.
With the hike in Brazil’s benchmark interest rate Selic last Wednesday, to 12.75%, and still high cash availability, revenues are expected to increase even more this year given the expected lengthening of the monetary tightening cycle to tackle inflation.
In the case of capital cities, which totaled income revenue of R$3.9 billion in the 12 months through February, the amount is equivalent to 8.5% of service tax ISS revenue collected in the same period. The amount is less representative for states. There were R$13.8 billion, or little more than 2% of sales tax ICMS. This tax is the most important one for states, with the largest collection in the Brazilian tax system, equivalent to 7.6% of the GDP in 2021.
“We are going to see revenue from financial investments rise even more this year,” said Juliana Damasceno, an economist with Tendências and an associate researcher at Fundação Getulio Vargas. The increase in the 12 months through February this year reflects the strong monetary tightening cycle last year, when the Selic was escalating, she said. “In 2022, we already have a double-digit interest rate,” she said. This will lead to income revenue growth, even though we no longer have the same help from the revenue cycle, which advanced over the past year with some economic growth, but with “a very strong contribution from inflation.”
As for the capital cities, there was also a gradual pickup in services after the sharp decline in 2020 under the impact of the Covid-19 pandemic, she said. The scenario was conducive to improved revenue flow and greater cash availability.
The cycle of interest rate hikes and revenue growth have the “same root, which is the rise in inflation,” Ms. Damasceno said. “We shouldn’t celebrate fiscal adjustment because of inflation or because of the medicine used to fight it, which is high interest rates. We know the harmful effect that the lengthening of the monetary tightening cycle has on the economy,” she said, citing the effect on consumer spending and household indebtedness amid a very critical social situation.
The data on income from financial investments were collected by Valor based on state reports submitted to the National Treasury Secretariat. The revenues received were considered, adjusted by Brazil’s official inflation index IPCA in the 12-month periods to February 2020 and 2021.
Most municipalities are likely to benefit from the higher Selic on revenues from investments, said Giovanna Victer, Secretary of Finance of Salvador and chair of the national forum of municipal secretaries of Finance within the National Front of Mayors (FNP). Those in debt are the exception because the higher interest rates and inflation increases the debt service. In the capital city of Bahia, according to the fiscal reports, these revenues totaled R$130.2 million in the 12 months through February, almost three times, in real terms, the amount reported in the previous 12-month period (R$45.5 million) and up 7% from the 12-months period through February 2020.
Among capital cities, São Paulo stands out. Brazil’s most populous city totaled R$1.6 billion in revenue with income from financial investments in 12 months to February this year, compared with R$517.8 million in the previous 12 months. The city also saw an increase of 93.3% compared with the period from March 2019 to February 2020.
The great advantage of those revenues is that they are not earmarked, said George Santoro, who was Finance Secretary of Alagoas until May 4. The revenues are mostly free and are not subject to the constitutional allocations for health and education. One exception is revenue from the Fund for Maintenance and Development of Basic Education (Fundeb) and some other transfers. In these cases, the investments follow more limited rules and the earnings are earmarked for the same purpose as the funds that gave rise to them.
According to the fiscal reports from Alagoas, the revenue with income from investments in the state totaled R$251.7 million in the 12 months through February, compared with R$73.8 million in the previous 12 months. In relation to the same period to February 2020, the increase was 70.3%.
Felipe Salto, Secretary of Finance of the State of São Paulo, says that the funds are likely to help execute investments planned for this year. The higher revenue from financial investments results from the increase in tax collection thanks to the state’s economic growth, he said, which made possible a cash availability of R$34 billion. According to the state reports, these revenues totaled R$3.1 billion in the 12 months through February 2022, almost four times the amount seen in the previous period (R$802.41 million) and two times the amount collected through February 2020 (R$ 1.63 billion) in real terms.
“This income is important, but it is not a trend in the medium term,” he said, considering the broader factors that contributed to the higher collection in 2021. He recalled that last year the collection of ICMS rose 17% year over year, in real terms. The perspective for this year is of “much milder growth,” between 3% and 4% in real terms.
In addition to the cyclical nature that led to the growth in revenues of the subnational entities, Ms. Damasceno said states must know that inflation and interest benefit revenues at first, but then take a toll on expenses. “The scenario provokes pressures for adjustments not only of servants, as we have seen since the beginning of the year but also of suppliers.” The effect on spending, she said, can happen more in the medium and long term. “You can’t get there in debt and have spent all that revenue. There may be a delay, but this adjustment will happen,” she said.
Ms. Victer, from Salvador, agrees that although revenues still reflect a recovery in the service sector, the picture is not one of tranquility, and caution is necessary in order not to commit “seasonal and temporary” resources with permanent expenses.
The more recent scenario of better revenue flow has led the states to better invest funds, Mr. Santoro said. One challenge, however, is the limitations of the public power to tap financial instruments. He recalled that early last year, the state held a bidding process to get a better return on investments for about R$400 million in cash surpluses.
The call for bids imposed several restrictions on the participating institutions, such as net worth and other indicators, the former secretary said. The winner, he recalled, was a private-sector bank that offered yields above 110% of the interbank deposit rate (CDI). The State Prosecutor General’s Office, however, understood that the government was prevented from contracting with private-sector institutions. State-owned banks, he said, offered at the time 95% of the CDI. The issue was taken to the Economy Ministry, in search of more flexible rules, but there was no success, which led the state to contract other financial investments with state-run banks.
After announcing the possibility of paying the property tax IPTU with cryptocurrencies as of 2023, the City of Rio de Janeiro is now studying investments in this new asset.
In a note, the Rio de Janeiro Finance Secretariat told Valor that the city mulls “a cryptocurrency investment policy and a governance model for decision-making.” According to the note, a Municipal Committee of Investments in Cryptocurrencies will be created to refine the methodology. The municipality also said that in March it reached a cash balance of R$9 billion, the result of a cost-cutting effort, expense containment and structuring measures, such as the new fiscal regime and a tax overhaul.
Source: Valor International