Government pushes fiscal adjustment to next president

With its new fiscal target for 2017, the government will be able to raise its spending by R$8 billion to R$10 billion, Planning Minister Dyogo de Oliveira announced on August 16. The primary budget deficit projected for this year could therefore be smaller if the government maintained the spending freeze at the level set in the latest budgetary and financial programming decree, issued by President Michel Temer on July 28.

Yet the government decided to have some room to increase its spending as some services to citizens are under threat of being halted or become precarious in this second half, because of the cuts.

Discretionary expenditures in the 12 months through June were at the level of 2010. That is, the cut was big. But its impact on the fiscal result was very small.

By defining a primary-deficit target a little worse in order to accommodate a spending increase, the government gave two important indications. In the case of discretionary expenditures, which are basically the spending on maintaining the machinery of government (but don’t include spending on personnel or with healthcare and education) and on investments, the government considers it has cut as much as it could, and going beyond that is not possible without compromising the provision of public services.

Therefore, the government concluded, albeit belatedly, that it is not possible to make the necessary cut to balance its accounts only on discretionary expenditures, unlike what business sectors and some private economists advocated in the beginning of the Michel Temer administration.

The expenditures that are growing are mandatory and, to reduce them, it is necessary to change the legislation and even the Constitution, which is much more difficult.

The new fiscal targets also suggest that the burden of the fiscal adjustment was pushed to the next administration, which will be elected in October of next year. The primary deficit set for the central government (Treasury, Central Bank and Social Security) this year is equal, in nominal terms, to the shortfall in 2016, of R$159 billion. The same amount was maintained for 2018. However, there will be reduction in relation to the GDP if the economy grows as expected.

It is the next government who will have to turn a R$159 billion primary deficit, which it will inherit from the Temer administration, into a primary surplus over its four years. It is not possible to anticipate, obviously, what the future president will do to reverse such a dramatic fiscal situation.

Since it is impossible to increase the cut of discretionary expenditures, according to the Temer administration, the new president will have to propose cuts in mandatory expenditures. But since it takes longer to reduce such spending, everything suggests that substantial part of the fiscal adjustment will be made by increasing revenues, probably by raising the tax burden.

According to the announcement, the central government will still have a primary deficit in 2020, of R$65 billion, something like 0.8% of GDP. That is, the federal government will have a substantial primary deficit for the seventh year in a row. It is not yet possible to know when public accounts will have their first surplus because everything depends on the decisions to be taken by the next administration.

It is hard to believe that the future president will be able to reverse a primary deficit higher than 2% of GDP he or she will inherit from the Temer administration into a primary surplus in the first three years in office. That is, to post a primary surplus already in 2021. Even with the recovery of the economy and, consequently, of tax receipts.

The fact is that the public debt will increase greatly because of the new programming of fiscal targets released on August 16. The government simply increased the expected deficit for this and the next three years. With the changes, the central government’s primary deficit was increased, in cumulative terms through 2020, by R$199 billion — this is the increase of public debt that will occur in the period. If the deficit increases, the government needs to borrow more on the market to finance itself, increasing its debt.

The new official projection for the gross public debt as proportion of GDP until 2020 has not yet been released. Before the target changes, it was that the debt would reach 77.7% of GDP in 2020. With the new targets, it will certainly surpass 80% of GDP.

 

Source: Valor Econômico