There will be no surplus and the government knows it

Before defining how much of this year’s budget it will cut, the government will have to take a much more difficult decision. President Dilma Rousseff and her economic ministers will have to evaluate whether it is worth keeping the illusion that it’s possible to achieve the primary-surplus target of 0.5% of GDP. This is the first time in which the year begins with all private and government economists aware that the fiscal target is a mirage. The best option for the government may be showing full transparency to society on the gloomy situation of public accounts.


In the beginning of 2015, the government announced a record R$69.9 billion spending cut and said it was necessary to achieve the primary surplus set in the Budget Guidelines Law (LDO). The official strategy of saying it was still possible to comply with the target was kept until July, when economic officials threw in the towel. The claim presented by the government for such delay in acknowledging the obvious was that the deterioration in tax revenues only became clear in mid-2015. When this happened, it changed the target, according to the official version.

What’s new this year is that it is not possible for the government to maintain the same speech. Whoever still held hopes that the primary surplus set by the LDO for 2016 was possible was frustrated by the preliminary information on January’s federal tax revenues. Data from Siafi, the electronic system that registers all federal revenues and expenditures, show a real year-over-year drop of about 5% in the collection of taxes administered by the Federal Revenue (excluding Social Security contribution) in January.

The Siafi shows widespread revenue decline in all taxes in January, a result of the continuing deep contraction of the Brazilian economy. Market analysts redid their calculations and now estimate a 3.2% GDP contractions this year, according to the Focus survey released Monday by the Central Bank. To some, the recession could be even worse, possibly shaving more than 4% of the country’s output, as bank Itaú economists predict.

The drop in January revenue is a serious problem, because the comparison is with the same month in 2015, which in turn had already showed a real reduction of 4.5% from January 2014. There is real decline on top of real decline. Tax revenues therefore paint a disheartening picture.
The Fiscal Responsibility Law (LRF) establishes that until 30 days after the budget enactment, the executive branch will set the financial programming and the timetable of monthly disbursements, that is, the cuts in budget allocations. The decree with the programming may therefore be published Friday in the “Federal Daily Gazette,” since the deadline set in law is Sunday.
The technical staffs of the Planning and Finance ministries spent the last few days remaking their estimates of government expenditures and revenues this year. The fiscal picture that is emerging from this review is certainly discouraging.

There will be downward revisions of all parameters used in the revenue estimate. The economy will contract more than the 1.9% projected in the budget. Total wages and salaries will probably fall more than the 4.55% used in the revenue estimates of the Social Security. The plunge in oil prices will considerably affect royalty revenues. On top of that, it is increasingly improbable that the government will obtain R$37 billion with asset sales, as forecast in the budget law.

The situation is aggravated by the fact that most of the mandatory expenditures are indexed to some adjustment mechanism that ensures the preservation of their real value. Retirement benefits and unemployment insurance are some examples. Add to this the fact that here is over 3% annual natural growth in the number of these benefits.

With falling tax revenues and mandatory expenditures kept mostly constant, the government would only have the option, as in previous years, of obtaining large non-recurring revenues. The problem is that some of the atypical revenues have already been considered in the budget law, as is the case of what will be obtained with the regularization of money illegally sent abroad by Brazilians and the case of funds that will enter the Treasury’s coffers with the concession of public services. In order for the federal accounts to end with a primary surplus this year, the government would have to obtain a significant level of other extra revenues.

The alternative would be cutting deeply the so-called discretionary expenditures, or the ones that the government is free to ax. The problem is that last year these expenditures were close to what was booked in 2013. Thus, to cut from 2015 the government would have to bring its discretionary expenditures to a level lower than that of 2012 or 2011.

In this case, the cut would hit mainly investments, because spending on the operation of the machinery of government (electricity, telephone, water, paper, hotel stays, tickets, etc.) were already sharply reduced last year. The most the government can do is keep current expenditures constant or slightly down.

Part of the cut made in investments in 2015 simply meant not paying companies, which have not received for services or projects they delivered to the government. Thus, the government will have to regularize these payments this year in first place. It may cut funds to some programs it considers priority, such as My House, My Life, of subsidized financing to low-income housing. But this has a political cost that the government would be unlikely to bear.

By Ribamar Oliveira
valor.com.br 10fev16