Government now forecasts primary deficit through 2020

After two delays and a series of information mix-ups, the government finally decided to announce new fiscal targets for this and for the next year, also presenting a scenario in which Brazil will not have a primary budget surplus until 2020. Its goal in 2017 went from a deficit of R$139 billion to R$159 billion, same figure it will pursue in 2018, replacing the target of R$129 billion set in April. For 2019, first year of the next administration, the estimate is of a R$137.8 billion deficit, and for 2020, which was supposed to have the first surplus since 2013, the projection now is of a R$65 billion shortfall.

With the new targets, the economic team also announced a package of measures to enable the accomplishment of 2018’s goal, by increasing revenues and curbing government spending, as well as the second-largest group of mandatory expenditures, without having to resort to new target revisions.

The initiatives include changes in the form of taxation of exclusive funds, suspension of the increase of Reintegra, a tax benefit to exporters, rollback of payroll-tax cuts and collection of social-security contribution of 14% for people earning more than R$5,000 a month.

The change in taxation of exclusive funds, which are closed to the public and serve high-income investors, is in the system of collection, without alteration of the rates, which vary from 15% to 22.5%, according to the duration of the investment. Before, Finance Minister Henrique Meirelles said, these funds only had to pay taxes at the close of transactions. Now the collection will be made annually, as is common in the traditional fund industry. “As the taxation of exclusive funds becomes the same of open-end mutual funds, we have and advance of revenue and this advance is therefore of R$6 billion,” Mr. Meirelles said.

These measures together represent R$14.5 billion in additional revenues, and with the increase in the expected deficit next year by R$30 billion complete the fiscal shortfall of R$44.5 billion found in relation to the Budgetary Guidelines Law (LDO) still in effect. The government also reduced its projection for the minimum wage next year to R$969 from R$979 a month, something that produces savings especially for Social Security.

This year’s fiscal-target revision owed to the difficulty that the government has to produce revenues, result of a slow recovery of economic activity, of falling inflation and of expected extra revenues not materializing, such as the rollback of payroll-tax cuts, the second round of legalization of unreported assets held by Brazilians abroad and the risks involving some possible revenues, like the new Refis, a program for settlement of tax debts, which was expected to raise R$13 billion.

For 2018, the change is because of the difficulty in forecasting sufficient revenues to meet the target, even with the spending cap fully working. Factors such as the lower forecast of GDP growth, to 2% from 2.5%, and the lower inflation, which is likely to generate R$23 billion less to the government in 2018 (compared with R$19 billion in projected losses for 2017).

The government has also announced a program of reforming the state with measures that basically affect public servants, such as the postponement of raises to civil servants (military were preserved), whose expected impact is R$5.1 billion, effective implementation of the compensation cap of the Federal Supreme Court (STF), which produces gains of R$725 million, canceling of salary raises to workers appointed by politicians, reduction of perks, in addition to the extinction of 60,000 vacant posts, which don’t have direct impact, but reduce the risk of spending increase.

The announcement of the new targets and of the package of measures occurred more than one hour late and was partly first reported by the government leader in the Senate, Romero Jucá (Brazilian Democratic Movement Party, PMDB, of Roraima), who advocated an even bigger deficit as target.

Mr. Meirelles made a point of emphasizing that the decline of the projected revenue for 2017 was caused mainly by lower inflation. “The 2018 change also comes from the drop of expected revenue,” he said, pointing out that inflation expectations have also fallen sharply. “Falling inflation is excellent news for the country, let’s make this very clear,” he added. In his assessment, this deceleration of inflation is reason for optimism to the country and the consumers and good sign for economic activity.

The minister also announced that the change in the deficit target for the central government in 2017 and 2018 also caused adjustments in the targets of the consolidated public sector, which includes states and municipalities.

For 2017, the deficit rises to R$163.1 billion from R$143.1 billion. The expected result of federal state-owned companies and of states and municipalities was kept at deficits of R$3 billion and R$1.1 billion, respectively.

In the case of 2018, the consolidated public sector’s target will be a R$161.3 billion deficit, up from R$131.3 billion. The expected deficit for federal state-owned companies was kept at R$3.5 billion, and for state and municipal government the goal is a R$1.2 billion surplus.

Mr. Meirelles said the forecast of primary revenues in 2017 fell R$42.5 billion from the figure that was in the Annual Budgetary Law (LOA). It went to R$1.38 trillion from R$1.42 trillion. In the case of the administered revenue, the forecast is R$50 billion smaller than in the LOA.

The minister also highlighted that the composition of economic growth, with greater presence of sectors that collect less taxes, such as agriculture and services, with effect accentuated by the recession, has negatively affected the government revenues.

In addition to reducing the projection of real GDP growth, the estimate of nominal GDP, which is what directly affects estimates, fell to R$7.14 trillion from R$7.24 trillion. These figures, Mr. Meirelles said, will be sent to Congress in the annual budget draft of 2018.

 

Source: Valor Econômico