Expansion was driven by fiscal situation favored by extraordinary factors

08/10/2022

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State governments have increased nearly threefold investments in the first half of this year, in real terms, driven by this year’s elections and a fiscal situation favored by extraordinary factors. The 26 states and the Federal District jointly invested R$31.4 billion between January and June 2022. In the same months last year, they injected R$11.8 billion. In 2018, also an election year, they invested R$13.48 billion, according to figures adjusted by inflation. Current revenues, which include collections and transfers from the federal government, rose 7.3% year-over-year, in real terms, in the first half of the year, and 21.7% compared with 2018.

Representatives of states and experts in public accounts say the situation of revenues is still influenced by cyclical and non-recurring factors. The picture is likely to begin to change in the second half.

Changes on how states calculate sales tax ICMS levied on fuels, electricity, and telecommunications are expected to at least slow down the increase in the collection of the main state tax. Besides this, expenditure pressures, such as salary adjustments granted during the first months of the year, are seen as weighing more heavily in the second half. Even so, in general, specialists say the result of 2022 is expected to be positive given the good performance of the first half and previous periods. As for the fiscal situation in 2023, they still see many uncertainties.

A set of cyclical factors, which included extra transfers from the federal government due to the pandemic and higher revenue driven by the recovery of the economy, inflation, and high commodity prices, played a role, said Ursula Dias Peres, a professor of public policy at the University of São Paulo (USP) and a researcher for the Solidary Research Network. These factors provided the states with more funds in 2022 than at the end of the previous terms in 2018, when the Brazilian economy was coming out of a recession.

“There are two distinct periods,” she said. Part of what caused the most recent increase in revenues helped the states in the first half of 2022 and, for this reason, despite recent measures to reduce ICMS rates in key sectors, states may end the year with a better relative collection than in 2018 or 2021.

Besides revenues, what helps explain such an increase in investments this year was the space opened by the restrictions on salary adjustments for public servants resulting from Complementary Law 173/20, she said. The suspension of debt payments in 2020 also helped generate some leeway and contributed to the current fiscal picture, although the situation among states is heterogeneous, Ms. Dias Peres said.

All 27 federal entities increased investments in the first half of 2022 year-over-year in real terms. In 19 of them, investment at least doubled. The total expenses of the states grew much less than the investments. In the first half, they increased 5.8% in real terms in relation to the same period last year. Current expenses, which are linked to regular and payroll expenses, rose by 2.4%.

Manoel Pires — Foto: Wenderson Araujo/Valor

The level of growth in total spending, above the expected GDP growth for this year, shows that states, although with divergent performances, expanded combined demand during the first half, said Manoel Pires, a researcher at Fundação Getulio Vargas’s Brazilian Institute of Economics (FGV/Ibre). In the analysis of spending, he highlighted the “impressive” growth of investments, which reflects the good performance of revenues, and the elections. The result also reinforces the idea that these amounts were significantly subdued before, he said.

Spending on salaries is expected to put more pressure on states since they were adjusted earlier this year, said George Santoro, finance secretary of Alagoas. The greatest pressure is expected to be felt in the second half, he said, when collection is likely to fall due to the changes in ICMS collection. Alagoas is expected to maintain investments of R$1.8 billion foreseen for 2022, but a larger portion is likely to be financed by credit operations, not by own funds.

São Paulo’s Secretary of Finance and Planning Felipe Salto says that even with the impacts of the new ICMS changes, tax collection in the state is expected to reach R$201.9 billion in 2022, compared with R$195.4 billion foreseen in this year’s budget law. The “good fiscal indicators” and a cash flow of nearly R$35 billion give the state “a certain comfort,” he said. Investments are seen above R$20 billion in 2022, which would be one of the highest levels ever, he said.

But Mr. Salto is not so upbeat. He recalled that the compensation to states for ICMS losses is still being discussed. And, in his view, “the unbalance in the federation pact caused by the federal government’s attempt to interfere in the states is worrisome. There is no guarantee for increased spending, as the federal government seems to suggest.”

The secretary also points out that there is a “clear” slowdown in revenues. In the 12 months through March, the collection of ICMS increased 14.5% year-over-year. In the 12 months through June, it decelerated to 8.9%, and in the 12 months through July, to 6.9%. In July, collection dropped 0.7% year-over-year in real terms. In March, also in a year-over-year comparison, the increase was 8.2% in real terms.

Estimates for tax collection next year are not yet closed, Mr. Salto said, but the scenario will be “much more adverse” with the perspective that the Brazilian economy will slow down compared with 2022. In 2023, we will have lower inflation rates, but the interest rate “will take time to return to civilized levels,” he said. Nominal revenue will grow less and increase pressure, with a performance “that may be quite different from what we had in the last two years.” In São Paulo, according to the most recent collection figures, inflation contributed with about 40% of the revenue increase, while 60% were structural factors, Mr. Salto said.

In 2023, Mr. Pires said, with the possibility of a collection impacted by changes in ICMS, the sensation that state governments will boast fiscal space can change a lot. The data show that the current fiscal situation has mainly benefited investments.

Christiane Schmidt, treasury secretary of Goiás, also highlights the cyclical nature that led to the most recent increase in tax collection, and says the big challenge will come in 2023. Part of the positive fiscal result of 2021 in Goiás is expected to be used in 2022. “What happens from 2023 on?” Next year, she says, mandatory expenses, including salary adjustments, are expected to weigh, although still cushioned by spending limitations on states.

The secretary says that for now, one of the focal points this year is to comply with the spending cap rule put in place by Complementary Law 156/16, established in exchange for renegotiation of debt with the federal government. The drop in revenue with the change in ICMS collection can give rise to spending beyond the constitutional minimum limits to health and education, which makes compliance with the ceiling more difficult, she said. In addition, the inflation rate, previously estimated at 9% in 2022, may stand at 7.5%, which would reduce the margin for increased spending.

For Ms. Dias Peres, the performance of state accounts in the next term is uncertain. On the revenue side, the most obvious question marks are the recent changes in ICMS tax rates levied on fuels, electricity and telecommunications. “It was a structural adjustment for a cyclical problem driven by international prices, exchange rates, and inflation.” In her view, it is not yet clear how the new state administrations will deal with this. Another factor expected to weigh on revenues is the reduction in the Industrialized Products Tax (IPI), a tax collected by the federal government, but whose collection helps finance the federal government’s transfers to state governments and municipalities.

In the expenses front, there should be the effect of adjustments for public servants, in some places already scheduled for next year. Besides this, she points out, the current investments are also expected to give rise to an increase in current expenses, due to maintenance and personnel. Equipment in the health sector, she highlights, generates annual expenses corresponding to 90% of the amount invested.

*By Marta Watanabe — São Paulo

Source: Valor International

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