The states started this election with accelerated investments, even with more restrained revenue growth. The combined investments of 26 states and the Federal District totaled R$4.24 billion in the first two months of the year, up 115% year over year.

The data shows, according to experts in public accounts, that these expenditures by states are likely to remain strong after a boost in 2021, when investments closed the year with a real increase of 83.6% compared with the previous year. Financial surpluses from previous years are expected to help this, even though revenue flow has already shown a slowdown at the beginning of the year. State governments ended last year with R$140.2 billion in cash, R$61 billion more than the previous year.

According to data from the fiscal reports of the states, the collection of sales tax ICMS totaled R$85.4 billion in the first two months of the year and is already behind inflation, with a real drop of 3.2% against the same period last year. ICMS is the main tax collected by state governments. Current revenues, which include other taxes and transfers from the federal government, advanced 2% in real terms in the same comparison.

The revenue and expenditure data for the first two months were collected by Valor from the fiscal reports submitted by the states to the National Treasury Secretariat (STN). The expenditures with investments considered the primary capital expenditures. The values for the first two months of 2021 were updated by Brazil’s benchmark inflation index IPCA.

For specialists, even though the situation is heterogeneous among the states, with considerable gains in ICMS collection or in specific revenues in some of them, the picture shows that the generalized and accelerated advance in tax revenues seen last year did not continue into 2022, said Manoel Pires, coordinator of the Fiscal Policy Observatory of Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre/FGV). For him, the scenario points to the end of a period of “fiscal bonanza.” The growth of current revenues as a whole, he says, should give way during the year and follow more the performance of tax collection.

The collection of revenues during the year is fraught with uncertainty, said Ursula Dias Peres, a professor of public policy at the School of Arts, Sciences and Humanities (EACH) of the University of São Paulo, and a researcher for the Solidarity Research Network. Besides the effects of the economic slowdown, she said, state revenues will still suffer the impacts of tax changes.

Among them, Ms. Peres highlights the change in the calculation of ICMS on fuels as well as the cut by the federal government in the rate of the Industrialized Products Tax (IPI). This tax finances the State Participation Fund (FPE), which is likely to impact the states that have an important source of revenue in the federal constitutional transfers.

Marco Aurelio Cardoso, secretary of finance of Rio Grande do Sul, says that the collection of ICMS in the first quarter of this year grew 9% in nominal terms compared to the same period in 2021, with a small real drop. For him, this is likely to be the trend for the year. “We don’t believe in a real growth of ICMS this year. At most we will restore inflation [in the collection] and probably stay a little below it.”

In Alagoas there is also a slowdown in the tax collection, said George Santoro, the state’s secretary of Finance. From January to March, ICMS revenue was about 1% higher than the same period last year. For 2022, the expectation is for real growth between this same rate and 2%, which, if realized, will represent a great deceleration in relation to the real increase of 10% in 2021 against the previous year, a level of growth “that won’t come back.”

Even with uncertain scenario for revenues, Ms. Peres said, the investments scheduled for the year are likely to be financed by surpluses in 2020 and 2021. In 2020, she recalled, in good part as a result of extraordinary transfers from the federal government as a bailout for states and municipalities to combat the economic effects of the pandemic and, last year, due to the surprising behavior of tax collection.

“The surplus was big,” Mr. Pires said. “As tax collection was much higher than what budgets projected, in which a much more conservative scenario predominated, most states managed to turn tax collection into cash. The primary result last year was at historical peaks.” This, he said, will help many states balance spending this year, including investments that typically grow in election year. “The revenue slowdown becomes an important focal point for next year’s budget.”

Mr. Cardoso says that in Rio Grande do Sul the expectation is to expand investments to around R$3 billion in 2022, compared to R$2.3 billion last year. The state expects to receive a green light to join the Fiscal Recovery Regime (RRF) offered by the federal government until the end of May.

In Alagoas, where investments accelerated in 2021, the forecast is to keep the works at an accelerated pace this year. According to Mr. Santoro, the investment committed in 2022 is expected to reach R$3.1 billion this year. Last year it was R$3.7 billion.

In a statement, São Paulo’s Secretary of Finance says that the forecast for investments in 2022 is R$27.1 billion this year, of which R$20.5 billion from the Treasury and R$5.3 billion from financing. In 2021, the state invested R$25.4 billion, and in 2020, R$11.2 billion.

The ICMS collection forecast in the budget is R$191.4 billion and the Secretary of Finance says that any revisions will be made throughout the year. Fuels represent about 11% of the ICMS collection and the freezing of the reference price until June and the eventual loss will be measured throughout the year. As for diesel, the adoption of the ad rem rate, according to the secretary, is likely to have a neutral effect for São Paulo consumers.

“The collection will not perform as if the ICMS continued to be levied on current market prices,” says the note. According to São Paulo’s secretary of finance, the collection still showed real gains in the first quarter, compared to the same period last year. In the first two months, there was a real advance of 0.3% considering the ICMS data from fiscal reports, updated by the IPCA.

On the expenditure front, the surge in investments compares with other spending categories. Personnel expenses and social taxes fell 0.72% in real terms in the first two months of the year in relation to the same period last year. Current expenses, which besides personnel also include costs, fell 1.64%.

This, however, is a picture that may change during the year, since it still reflects in large part the Complementary Law 173, which restricted adjustments of salaries of public servants until the end of last year, Ms. Peres said.

In the first months of the year, she said, there was pressure for real adjustments and increases, which can make a difference in this expense as of the next months. According to the Superior Electoral Court (TSE), because of the elections this year, real salary increases could be granted to public servants until April 5, but adjustments below inflation have a longer deadline. The increases, the researcher said, can make a difference in personnel expenses in the coming months and become permanent expenses of the states.

Source: Valor International

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