Governors increase current expenditures by 8.7% in their first two years in office, while revenues grow just 2.1%
01/29/2025
Despite efforts to balance budgets throughout 2024, state governors are expected to end the first half of their terms with expenditures rising faster than revenues. From January to October 2024, total current revenues for the 26 states and the Federal District (Brasília) grew by 5.3% in real terms compared to the same period in 2023, while expenditures increased at a slower pace of 4.7%. However, this followed a 2023 in which spending rose by 3.9% while revenues fell by 3.1% compared to 2022.
Looking at the first half of the current administrations, from 2022 to 2024, current expenditures increased by 8.7% in real terms, whereas current revenues grew by just 2.1% over the same 10-month period.
Experts warn that expenditures rising faster than revenues is a cause for concern, as it indicates ongoing fiscal expansion that could become unsustainable if the economy slows down or enters a recession.
The data, collected by Valor from budget execution reports submitted by states to the National Treasury Secretariat, are based on actual revenues and settled expenditures. Figures for years prior to 2024 have been adjusted for inflation using the official IPCA index.
Manoel Pires, coordinator of the Fiscal Policy and Public Budget Center at the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), noted that state spending has been growing at a rate nearly two percentage points above GDP growth over the past two years.
“And we’re talking about strong GDP growth. The states are significantly stretching their expenditures, which is concerning. Looking ahead, we have a fiscal framework and several mechanisms in place that allow this trend to continue,” Mr. Pires said.
Even from January to October 2024, when overall fiscal performance was better than in the previous year, current expenditures still outpaced revenue growth in ten states: the Federal District, Mato Grosso, Mato Grosso do Sul, Pará, Paraíba, Piauí, Rio Grande do Norte, Rondônia, Sergipe, and Tocantins.
Personnel costs
In general, personnel expenses and social obligations were the kry drivers of rising expenditures. These costs increased by 5.2% in real terms from January to October 2023 and continued to rise, albeit at a slower pace of 3.5%, over the same period in 2024. Between 2022 and 2024, real growth in personnel expenses reached 8.9%.
Felipe Salto, chief economist at Warren Investimentos, noted that the data indicate a worrying trend of revenue deceleration when comparing pre- and post-pandemic periods.
“On the other hand, there was indeed a sharp increase in investments when revenues were performing better,” he said, adding that fiscal conditions vary across states. “With economic activity slowing down in 2025, we will soon see a wave of pressure from state and municipal governments that failed to prepare for leaner times.”
State revenues
While expenditures rose, revenues fell by 3.1% in 2023, with state tax collections dropping by 6.7%. A key factor in this decline was the 2022 reform that reduced Brazil’s state-level value-added tax (ICMS) rates on key sectors such as electricity, telecommunications, and fuel. Although these changes started affecting state revenues in the second half of 2022, the full-year impact became evident in 2023.
In response, some states adjusted their tax policies, including raising the standard ICMS rate. These measures helped partially restore revenue levels.
In 2022, the restrictions on ICMS rates contributed to a 0.3% decline in state tax revenue from January to October, compared to the previous year. However, in 2021, revenues had surged by 11.6%, fueled by high inflation and commodity price spikes, creating a high comparison base that contributed to weaker results in subsequent years.
Samuel Kinoshita, São Paulo’s secretary of Finance, described 2023 as a “very challenging year.” The state implemented a program called “São Paulo na Direção Certa” (São Paulo in the Right Direction), which included institutional improvements and administrative restructuring to enhance efficiency and reduce costs. The program also involved a review of tax benefits, leading to the elimination of 88 out of 263 evaluated incentives, reducing tax exemptions by R$10.3 billion in 2025. Mr. Kinoshita did not specify the expected revenue increase. He said the main goal is not to seek revenues but to reassess the economic impact of public policy.
For the second half of the administration, Mr. Kinoshita said the goal is to expand these efforts, boosting efficiency and controlling expenditures to create room for investments.
Investment boost
State investment levels have fluctuated in recent years. In 2023, total state and Federal District investments declined by 22%, only to rebound by 11.1% in 2024. The data does not include financial inversions. However, from 2022 to 2024, investment levels fell by 13.3%.
Despite recent declines, investments remain historically high. From January to October 2024, states invested R$60.6 billion, nearly triple the R$21.5 billion in 2019 and more than double the R$25 billion in 2020, adjusted for inflation.
The surge in investments in previous years was partly fueled by extraordinary federal transfers during the COVID-19 pandemic and rising revenues. In 2022, an election year, state investments totaled R$69.86 billion between January and October—the highest level since 2019.
Federal transfers have played an increasing role in state revenues. In 2023, these transfers grew by 5.8%. That year also saw a decline in current revenues. In 2024, they increased by 6.7%, surpassing revenue growth by 1.4 percentage points. Between 2022 and 2024, transfers grew 12.9% in real terms.
Compared to the same period in 2019 (January to October), state revenue from federal transfers surged by 52.3%. As a result, the share of federal transfers in total state revenue rose from 20.6% in 2019 to 26.8% in 2024.
Mr. Pires of FGV Ibre explained that the federal government’s fiscal strategy depends on increasing tax revenues, part of which is distributed to states and municipalities. For example, the rise in income tax (IR) revenue, a key component of the federal government’s revenue-boosting measures, feeds into the State Participation Fund (FPE), which channels funds to state governments.
Sergipe projects
For Sarah Tarsila Araújo Andreozzi, finance secretary of Sergipe, a slowdown in the FPE is a key concern for 2025. The fund’s resources, she said, account for nearly half of Sergipe’s total revenue. Given this dependency, the state projects an 8% nominal increase in total revenue for 2025—a conservative estimate, she noted, considering the state’s solid performance in generating its own revenue.
In 2024, ICMS collections saw a real increase of 6.4%. Fiscal report data show that the state’s own revenue rose 7.9% in 2023 and another 4.1% in 2024 (January to October, compared to the same period the previous year). From 2022 to 2024, revenues grew 12.3% over the same months, in contrast to a 1% decline across the 27 states and the Federal District.
Ms. Andreozzi said several factors have contributed to this revenue growth, including raising the ICMS modal rate from 18% to 19% in 2023, adjustments to social welfare program Bolsa Família, which boosted consumption, and the implementation of a state tax installment program, the Refis, in 2023. She also emphasized that Sergipe has a relatively low tax base with room for growth. The current administration has stepped up efforts to combat tax evasion and encourage compliance, leveraging technology and compliance programs—tools that, she pointed out, “have long been in place in other states.”
In 2023, the first year of the current administration, the state curbed spending, contributing to a primary surplus of R$1 billion. That year, public sector wage adjustments were kept below inflation, while in 2024, there was a real adjustment, with increases for categories whose salaries had fallen behind.
Looking ahead to 2025 and 2026, the focus will be on investments, she said. In 2023, the state developed projects, and in 2024, it conducted public tenders. “Now, in 2025, we expect to see actual projects materializing and investment increasing. Without this, we cannot stimulate the economy or attract businesses. With tax reform, industries need to be drawn in with strong logistics infrastructure and a skilled workforce. We are working on both fronts.”
Fiscal expansion
Mr. Pires of FGV Ibre warned that fiscal decentralization has gained momentum in recent years and is set to continue into the next political cycle. He cited the recently enacted PROPAG law, a federal debt refinancing program for states, as a key driver of fiscal expansion.
A National Treasury technical report outlined two scenarios for the federal impact of PROPAG. In one, the program could cost the federal government R$105.9 billion between 2025 and 2029. In another, if states amortize R$162.5 billion in debt, the federal impact could be a positive R$5.5 billion over five years.
PROPAG has drawn criticism from heavily indebted states, which seek to use the National Regional Development Fund (FNDR) to repay debts to the federal government—a provision vetoed by President Lula.
Mr. Pires also pointed to upcoming structural changes, such as the tax reform that will allocate new resources to states from 2029 onward.
He noted that in an economy already growing above potential and facing inflationary pressure with high interest rates, the risk of fiscal expansion at the state level is concerning. “If we face a recession, states with rigid budgets and rising expenditures may be forced to drastically cut investments, which could increase pressure on the federal government for financial support.”
Another key factor driving expenditure growth is borrowing. “Loans secured in 2023 and 2024 could boost investments in 2025,” Mr. Pires said. “This is a significant fiscal expansion, likely with lasting effects.”
*By Marta Watanabe – — São Paulo
Source: Valor International