The Minister of Finance, Fernando Haddad, announced on Wednesday (27) a .
In addition to the cost-cutting measures, Haddad sent one of President Luiz Inácio Lula da Silva’s (PT) main campaign promises to Congress: .
The announcement as a whole, however, generated widespread discomfort in the market, so that . Looking at the rest of the world, .
Next, understand in five points the weaknesses that displeased investors in relation to the fiscal package.
Communication
The first friction in the dialogue was the way it was initiated. The announcement on national television at 8:30 pm on a Wednesday was seen more as an announcement than an effective announcement of economic measures.
“Instead of selling this as a necessary adjustment, especially in the external environment that is much worse than imagined, we are left with this mess, this bag of spending measures”, assessed Tony Volpon, former director of the Central Bank (BC) and columnist for CNN Moneyafter the announcement.
The lack of detail bothered the market, but the government had already planned a .
However, even with the clarifications, doubt remained in the air, according to Helena Veronese, Chief Economist at B.Side Investimentos.
“Despite reinforcing in his speech that the measure presupposes tax neutrality, as it would be accompanied by compensation, it is not clear, in numbers, how this would happen. Furthermore, this neutrality counts on the approval in Congress of both the exemption for those earning up to R$5,000 and the tax increase for those earning over R$50,000, a delicate issue that could, indeed, result in less revenue. for the government”, he wrote in a post-collective note.
Greater detail would come with the publication of the texts, after forwarding to the Legislature. “There is little explanation of each item. The lack of information fuels distrust. And there are items there that do not deal with fiscal adjustment, such as the DRU”, assesses Zeina Latif, managing partner of Gibraltar Consulting.
Even though the package included some measures assessed as “indeed structural” by Veronese and other analysts, communication continued to fail to deal with one of the elephants in the room.
Income Tax Exemption
“In our opinion: after long weeks of waiting for a spending cut announcement, this announcement was accompanied and overshadowed by the IR exemption for those earning up to R$5,000, that is, by a measure that implies giving up revenue. The impression given is that of a government that is not very committed to austerity of public accounts”, explains the Chief Economist at B.Side Investimentos.
The measure divides opinions between those who defend it, and those who believe that this was not the time to announce a tax waiver proposal.
“Amidst the market’s growing distrust in the conduct of economic policy, especially fiscal policy, new layers of uncertainty about the solidity of public accounts were launched”, points out Murilo Viana, economist at Finance Consultoria.
“The measure will have a very high fiscal cost, between more than R$40 billion and around R$100 billion per year, depending on whether the expansion of the exemption band will also result in the correction of the other bands in the IRPF table”, he concludes. the public accounts specialist.
Shy and overrated package
Among the measures presented by the head of the economic team, limiting the growth of the minimum wage was included, one of the main market demands in order to ensure the sustainability of the new spending rule.
The new framework, approved in 2023, put an end to the spending cap. From then on, government expenses can grow between 0.6% – in periods of contraction – and 2.5% – in times of expansion – above the previous year’s revenue and with values adjusted for inflation. Within the band, expenses may grow by up to 70% of the previous year’s revenue variation.
However, amounts such as the minimum wage and other government expenses have been growing at a faster rate than allowed by the fiscal rule, in order to put pressure on discretionary spending – investments – in the federal budget.
Other proposals included were:
- Readjustment of salary payment;
- Adapt the growth in spending on parliamentary amendments to the framework limit (2.5% per year);
- Changes in the minimum retirement age for military personnel;
- Limitation on pension transfers.
Although the package meets some measures requested by the market, the assessment is that the execution of these demands was not adequate and that the entire work was not bold enough, points out Rafaela Vitória, chief economist at Inter.
“The review of the allowance and the limitation of the readjustment of the minimum wage are in the right line, as is the use of amendments to comply with the health spending floor, which should limit the faster growth of these expenses, but with a modest impact according to the rules announced”, says Vitória.
But, even if some measures are agreed upon, what is clear is that the savings indicated by the government (R$71.9 billion) are overestimated.
“The Treasury often exaggerates the impact of measures. So, in addition to the mistake of discussing taxation now (which was ruled out by Congress), the value of the fiscal impact itself would be insufficient and, worse, probably lower than estimated”, emphasizes Zeina Latif.
According to an estimate by BTG Pactual, the amount that should be saved in the coming years is R$26 billion less than that indicated by the Executive’s economic team.
With this weakness of the measures in mind, Luiz Fernando Figueiredo, former director of Monetary Policy at the BC and president of the Board of Directors of Jive Mauá, believes that the increase in the Selic, the country’s basic interest rate, scheduled for the following days December 10th and 11th.
Itaú’s team of analysts estimates a gap of R$19 billion. “We maintain our general assessment of a package below expectations and with few structural changes. The choice to change the minimum wage rule brings gains that are less than ideal in the long term (in 10 years of R$ 80 billion vs R$ 300 billion if the rule were equivalent to 70% of GDP t-2, assuming average GDP of 2% ahead, for example)”, explains Pedro Schneider, economist at Itaú Unibanco.
“The difference compared to the government’s estimates comes mainly from a lower expectation of gains from the reinforcement of anti-fraud measures and the government’s expectation of savings with the extension of the DRU. The Minister of Finance also announced that the nest egg and gas voucher programs will be within the budget and fiscal statistics, which, if implemented, would help to alleviate some of the concerns about accounting creativity, although without resulting in fiscal savings. ”
Public debt sustainability
Despite this last point, some economists estimate that the measures may be sufficient to breathe life into the framework, at least until the end of Lula’s term.
“Even if they don’t admit it, the economic team’s objective is to breathe new life into the framework until 2026, preventing it from collapsing sooner. Then a new government will address this or it will have to be reviewed”, points out Maílson da Nóbrega, former Minister of Finance and partner at Tendências Consultoria.
However, Jeferson Bittencourt, head of macroeconomics at ASA, assesses that this was already a point that should be clear and guaranteed, as it deals with the issue of the government complying with the rule it itself established and not violating the fiscal responsibility law. .
“And as the market average, according to Prisma Fiscal, has a projection of expenses growing in line with the framework, simply guaranteeing this trajectory should not be a new positive fact”, asks Bittencourt.
What would be positive would be for the package to bring the country’s gross public debt to stabilization and then to its contraction. “We did not see individual spending cuts measures as a factor that contributes to long-term fiscal sustainability, because the government’s intention was to make the framework’s spending limit viable,” says the ASA analyst.
Here, Samuel Pessôa, researcher at Fundação Getulio Vargas (FGV) and head of research at Julius Baer Brasil, takes up the issue of IR exemption.
“What is the structural problem that most bothers the financial market? There are rules that require public spending to grow faster than the economy. Now, the government has announced an economic package whose most important point is a relief of R$50 billion”, .
The FGV researcher indicates that the measure could put even more pressure on the Brazilian public debt situation. He points out that Lula could end his third term leaving the country with a debt whose value is equivalent to 86% of the Brazilian Gross Domestic Product (GDP) – the sum of all the wealth generated in the country.
If the forecast comes true, this would mean a hole 14 percentage points larger than that received by the previous government, of Jair Messias Bolsonaro (PL), who ended his term with a debt of 72% of GDP.
“My impression is that the economic team realized that it is not possible to stabilize the debt/GDP ratio or reduce it without very profound structural changes”, concludes Maílson da Nóbrega.
“The package takes measures in the right direction, but it lost credibility at the outset. And so, even with good things, it does not solve the problem of the growth of the debt/GDP ratio. It may postpone the crisis, but the encounter with the collapse of expectations is still on the horizon.”
Political clash
Finally, the political scenario does not seem to be the most favorable for the package to be processed. With less than a month until the parliamentary recess, even with other agendas holding up the queue.
Furthermore, the market fears that the package, which is already fragile, will be further weakened when it passes through the hands of the Legislature.
“We understand that there are still outstanding details and that there are risks in the process in Congress, such as, for example, in the definition of what will be counted as taxable income and risks of increased tax avoidance, with taxpayers looking for ways to avoid increased taxation ”, concludes Schneider, from Itaú.
Due to the resistance of the government base to some fiscal measures that affect social programs, Maílson da Nóbrega believes that “there is no political environment to carry out this reform”.
The final diagnosis by Rafaela Vitória, from Inter, is that the announced measures should end up being insufficient to even eliminate the 2025 deficit. The government works with the objective of closing the accounts at “zero to zero”, but with a margin for of 0.25% of GDP, equivalent to around R$28.8 billion.
Inter’s estimate, however, is that government spending will end up at R$110 billion in 2025, or 0.9% of GDP.
“The estimated cut of just R$30 billion in 2025 and R$70 billion in 2026 is low considering the growth in spending of more than R$400 billion between 2024 and 2025 and shows the government’s political difficulty in facing the need for review broader scope of spending, including social programs that have seen accelerated and pro-cyclical growth in the last two years”, says Vitória.
