New transition calculation indicates margin of BRL 150 billion for extra spending in 2023 – 11/24/2022 – Market

The transition team of the president-elect, Luiz Inácio Lula da Silva (PT), currently sees a space of at least R$ 150 billion to increase expenses in 2023 without this representing an expansion in relation to the invoice programmed by the current government of Jair Bolsonaro ( PL) for 2022, his last year in office.

According to the new calculations of the transition, an additional expenditure in this proportion would keep constant the relation between expenditure and GDP (Gross Domestic Product), a measure used to evaluate the dimension of public policies in comparison to the size of the economy.

The account has been used as an argument in defense of the PEC (proposed amendment to the Constitution) of the Transition, which can authorize an expenditure of up to R$ 198 billion outside the spending ceiling rule — of which R$ 175 billion would finance the new Bolsa Family.

The size of the extra bill is one of the proposal’s most sensitive points and has been the target of criticism from the financial market and from parliamentarians, who demand a stricter limit. The PT’s discourse to try to reduce resistance is that the PEC only seeks to maintain the level of spending already contracted for this year.

In 2022, spending should be 19% of GDP, according to the projection released on Tuesday (22) by the Ministry of Economy. The 2023 budget proposal, in turn, was sent with an expenditure of 17.58% of GDP – a cut of 1.4 percentage points in the level of expenditure, something considered by the party as impracticable given the risk of collapse in public policies .

Economists’ main concern is precisely the country’s debt level. Maintaining the same level of expenditure in relation to GDP is not, by itself, enough to contain the upward trend in debt, which is also influenced by growth and revenue.

An increase in expenses of the magnitude intended by the PT, without compensation with an increase in revenue or a cut in other expenses, would have the consequence of increasing the account deficit in 2023. The Budget officially projects a shortfall of R$ 63.5 billion, but the current government has updated this estimate to a lower number, although still negative at BRL 40.4 billion.

On Monday (21), former Minister of Finance and Planning Nelson Barbosa, who is one of the four economic coordinators in the transition, raised the discussion by indicating that matching Bolsonaro’s spending would allow an extra spend of R$ 136 billion without it representing a fiscal expansion.

The speech was made, however, when the projection for 2022 was still an expenditure of 18.9% of GDP, before the update made by the Ministry of Economy. As the Bolsonaro government itself expects slightly higher spending, the difference in nominal values ​​also rises, getting closer to R$ 150 billion.

There is a second point that could make the account, defended as neutral by the transition, grow above R$ 150 billion.

The IBGE (Brazilian Institute of Geography and Statistics) revised the 2020 GDP, indicating that there was a less intense drop in economic activity than initially calculated. The incorporation of this change in the calculation base should trigger a wave of revisions in the data for the following periods.

The final balance should be an even greater amount of income generated in the Brazilian economy, both for 2022 and in the expectation for 2023.

If the calculation base gets bigger, the distance of 1.4 percentage points of GDP to match the expenditure made by Bolsonaro this year tends to represent an expansion margin greater than the current R$ 150 billion calculated by Lula’s transition.

On the other hand, the gain may be less intense if a scenario of lower economic growth prevails next year. For the time being, the 2023 Budget is being formulated with an estimated increase of 2.5% in GDP, a scenario considered optimistic by the market (which expects 0.7%).

On Monday, Barbosa’s initial statement about the space to spend more without generating fiscal expansion generated noise because it was received by parliamentarians as a kind of limit for the negotiations of the Transition PEC, more conservative than the values ​​until then discussed by the PT congressmen.

The logic that the proposal only seeks to maintain the level of expenses, however, has been gradually incorporated into the political discourse of PEC negotiators.

“It’s a very reasonable argument. Why? The market cannot go into crisis because 19% of GDP is already this year. If we have an exceptional spending ceiling of up to R$ 136 billion, there is no reason for the market to be surprised because it is what it is today, in terms of percentage of GDP, which is 19%”, says senator Marcelo Castro (MDB-PI), general rapporteur of the 2023 Budget.

According to him, if the margin gets bigger due to the new GDP estimates, “even better”.

Despite serving political reasoning, the account should still raise questions in the economic sphere. Government technicians and outside economists assess that an expenditure level equivalent to 19% of GDP is high, and the ideal would be to seek a reduction.

Between 2015 and 2021, this proportion fluctuated between 18.6% and 19.9% ​​of GDP —not counting the year 2020, when spending jumped to 26.1% due to Covid-19.

The existence of public deficits indicates that the government is financing expenditures by issuing a larger volume of Brazilian debt. The cost is close to the economy’s basic interest rate, the Selic, currently at 13.75% per year.

The PEC negotiators, in turn, have also been working on this part of the speech. One of the arguments is that Bolsa Família transfers encourage consumption and, consequently, the collection of taxes by the government. In this way, a part of the additional expense would return in the form of revenue.

There is also a wing of the transition that defends the formulation of a menu of measures to review expenses or increase revenues (with reversal of exemptions, for example), in order to compensate a part of the extra bill of the PEC.

Last week, the vice-president-elect, Geraldo Alckmin (PSB), coordinator of the transition, said that the new government will seek to resume the primary surplus to reduce the public debt, but that this cannot be done in 24 hours.

“There will be a primary surplus, there will be a reduction in the debt, but this cannot be done in 24 hours. This is done over time,” he stated.

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