Brazil: Drop on Revenues Leads to Fiscal Deterioration
Brazil's fiscal situation has deteriorated, shifting from a 0.6% primary surplus in 2022 to a 0.9% deficit by July 2023. Declining revenues relative to GDP and taxes levies have led to a significant 1.8% reduction as a percentage of GDP in the first seven months of the Lula Government. Expenditures have remained stable compared to December, supported by programs like the New Bolsa Família. While the Debt/GDP ratio stayed relatively constant, sustaining fiscal stability depends on economic growth to boost revenues. A challenging path lies ahead, with a -0.5% deficit expected in 2024 and the Tax Reform in Congress taking on added importance.
Figure 1: Primary Expenditures and Revenues (% of the GDP, 12-months sum)
Source: STN and BCB
The fiscal situation in Brazil has recently deteriorated significantly. In 2022, the country boasted a 0.6% primary surplus, but by July, this figure had plummeted to a 0.9% deficit. This alarming shift can be attributed to two distinct factors. Firstly, there was a sharp decline in revenue relative to the GDP. In 2022, the government had experienced an influx of extraordinary revenue sources, such as the renewal of TV concessions, oil royalties, benefits from the high oil prices observed in 2022, and deferred taxes from the pandemic. However, those revenues have not repeated in 2023 and coupled with an increase in subsidies in the form of tax levies, has resulted in a 1.8% reduction in revenue/GDP during the first seven months of the Lula Government.
Figure 2: Primary Result (% of the GDP, 12-months sum)
Source: STN and BCB
On the other hand, expenditures remained relatively constant, proportionate to GDP, compared to December. The expansion of transfers program in the form of the New Bolsa Família and salary increases for public employees have enabled expenditures to keep pace with the robust GDP growth.
Nonetheless, the Debt/GDP ratio has remained relatively stable during the initial seven months of the new government. The deterioration in the fiscal result was partially counterbalanced by nominal GDP growth driven by real economic expansion and persistently high levels of inflation. Nevertheless, we anticipate a slight uptick in this ratio in the latter half of the year, as GDP growth is expected to decelerate while debt issuance is likely to increase to meet the government's financing requirements.
Figure 3: General Government Debt (% of the GDP)
Source: STN and BCB
In an effort to improve the fiscal situation, the government is focused on increasing revenue, with a particular emphasis on a combination of income and consumption taxes. A new proposal has been submitted to Congress to tax special offshore funds, with the goal of collecting an additional 0.5% of GDP. However, it appears that controlling expenditures is not a priority for the new government, as new public hires and public investment on infrastructure are expected in the coming years. Therefore, to make its new fiscal framework sustainable, the government is banking on continued economic growth to boost nominal revenues. For 2023, we anticipate the primary deficit remaining at around -0.7% of GDP, with a reduction to -0.5% expected in 2024. Achieving a zero deficit in 2024 will be extremely challenging, and the government's push to increase revenues will make the delicate Tax Reform currently underway in Congress all the more critical.
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