The 2025 Budget Guidelines Act indicates a budget of R$3.60tn, down from R$3.76tn at the end of 2022

05/02/2024

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Jorge Messias — Foto: Divulgação/Daniel Estevão/AscomAGU

In its first year, the Lula administration has set a downward track for the federal government’s fiscal risks within the justice system, which had been on the rise and are a primary concern for the government starting in 2027, the year when all “precatórios”—IOUs issued by the judiciary branch—amounts will revert to primary expenses.

Data from the fiscal risk chapter of the 2025 Budget Guidelines Act indicate that the federal government’s exposure to judicial risks stands at R$3.601 trillion, down 4.2% from R$3.758 trillion at the end of 2022. This is the first drop since the transition from 2019 to 2020, after which the risk track record had increased.

The current amount does not yet account for the federal government’s gains from the lifetime pension revision thesis, ruled by the Supreme Court this year, as the figures were finalized considering outcomes until the end of 2023. Therefore, an additional R$480 billion remains to be deducted from the fiscal statistics.

“We have decided to set this track on a downward path, and my perspective is to deliver, during the president’s first term, this curve pointing downwards,” Jorge Messias, the federal attorney general, told Valor. “We cannot talk about a sustainable public debt track record without addressing the growing debt that will pressure the federal government’s budget, which is the court-ordered debts.”

Ms. Messias emphasized that the Federal Attorney General’s Office’s (AGU) strategy prioritizes reaching settlements when full wins in cases are unattainable. “Sometimes, it’s cheaper to acknowledge the rights still in the administrative phase than to move the decision to the courts. There have been administrations that chose to swap the budget for IOUs,” he said.

Moreover, according to Mr. Messias, in addition to seeking victories in court, there are “less obvious” strategies, such as settlements. “I joke that here at the AGU, I never lose. Either I win or I make a deal,” he said.

Despite the improvement in numbers, experts claim there are still risks in the scenario, as primary expenses for IOUs are on an upward track. Until 2027, the Lula administration received a waiver from the Supreme Court in the case that declared unconstitutional the establishment of a cap for IOUs in 2021, during Paulo Guedes’ tenure at the Ministry of Economy. Thus, it was permitted for the Lula administration to pay some of the court-ordered debts outside the fiscal rules until 2026.

A significant portion of the value that became a remote risk stems from favorable tax rulings for the federal government. This risk has been a priority for Finance Minister Fernando Haddad since the beginning of the year, with direct involvement in cases. He has even met with ministers on more significant issues, such as the Workers’ Severance Fund (FGTS) inflation adjustment trial, still pending review with an estimated impact of R$295 billion, and the lawsuit involving changes in the calculation base for the Business Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) on sales tax ICMS subsidies.

Lawsuits against the federal government are classified into three risk levels: probable, possible, and remote. Probable risk includes issues with a financial impact of R$1 billion or more that have had unfavorable rulings from the Supreme Court and Superior Court of Justice. Possible risk covers lawsuits already in the higher courts but not yet definitively judged—that is, when there has been some unfavorable decision by a collegiate body, but an appeal is still possible. Other lawsuits are considered remote risk and are not included in the fiscal risk schedules.

Possible risk actions decreased to R$2.586 trillion in 2023 from R$2.741 trillion in 2022, a drop of 5.7%. Probable risk actions slightly fell to R$1.015 trillion from R$1.016 trillion, a reduction of 0.1%.

The federal government’s risk classification considers the case phase—whether it is in a trial court or higher courts, for example, following the guidance of an AGU ordinance. This is different from the criterion used by companies in their risk analyses and provisions in financial statements, which consider the likelihood of winning or losing.

The classified lawsuits involve cases that could result in direct government expenses, the IOUs, as well as cases that will impact future projected revenue. This occurs, for example, when the government can no longer collect a certain tax or when there will be compensation.

One of the reductions in impact estimates last year occurred due to the Supreme Court ruling that recognized the incidence of social taxes PIS and Cofins on financial revenues. The risk estimated at R$115.2 billion was reclassified to remote. The merits were judged in 2023.

Three multi-billion cases awaiting decision from the Superior Court of Justice were also reclassified to remote after rulings in which the federal government won. The main one concerned the sales tax ICMS subsidies, with an estimated impact of R$47 billion. The decision upheld tax benefits related to the state tax in the calculation base of the Business Income Tax and Social Contribution on Net Income.

Also removed from the fiscal risk schedule were disputes about the crediting of social taxes PIS and Cofins in the resale of products taxed at a zero rate, estimated at R$31 billion, and the recognition that sales tax ICMS comprises the base of the Business Income Tax and Social Contribution on Net Income in presumed profit, with an estimated impact of R$2.4 billion.

One of the main topics that reduced the impact of non-tax lawsuits was the trial on the Pension Reform (as per Constitutional Amendment 103, of 2019) at the Supreme Court. The analysis has not yet concluded—may be finished next week—, but some votes have already led the federal government to estimate a reduction in impact to R$497.9 billion, compared to R$621 billion projected at the end of 2022.

The conclusion of another trial eliminated a risk of impact in this case, involving the calculation of the pension by family quota and per dependent. Another reason for the reduction was a change in the calculation methodology made by the Ministry of Social Security.

For federal public autarchies and foundations, the risk fell by R$2.5 billion. This happened due to the ruling on compensatory interest for expropriation for agrarian reform purposes, which limited it to 6% instead of 12%. The decision became final in 2023.

“The improvement in the fiscal risk estimates of the Budget Guidelines Act reveals that the government is succeeding in acting alongside the courts to uphold theses in favor of the Treasury and the Constitution,” said Felipe Salto, chief economist at Warren Investments. “Regarding the IOUs, it is necessary to develop better systems for identifying the conditioning factors of these expenses. The IOUs do not arise spontaneously.”

In 2023, the federal government created a fiscal risk committee involving the Federal Attorney General’s Office and the Ministries of Finance and Planning to monitor these fiscal risks. On average, the Attorney General receives 90,000 notifications per day. The expectation, in the coming years, is to act strategically, including the possibility of proposing legislative changes if necessary to keep judicial fiscal risks more controlled or, at least, more predictable.

• Por Guilherme Pimenta, Beatriz Olivon — Brasília
• Source: Valor International
• https://valorinternational.globo.com/