Estimates indicate the need for a new double-digit spending cut; bimonthly report must be sent to Congress this Friday
By sending the Bimonthly Report of Income and Expenses for the 4th two-month period to National Congresswhat should be done this Friday (20.Sep.2024), financial market economists calculate that the president’s government Luiz Inacio Lula da Silva (PT) needs to implement a new spending freeze.
According to experts, the decision will be necessary to maintain the objectives of meeting the lower band of the 2024 primary budget target and not exceeding the spending limit set by the new fiscal framework. Just like the containment announced in July – when R$11.2 billion was blocked and R$3.8 billion was contingent – the new freeze should include a double-digit figure, they calculate.
For economist Tiago Sbardelotto, from XP Investmentsthe government’s estimate for revenues from the resumption of the quality vote at Carf (Administrative Council of Tax Appeals) will be one of the decisive points in defining the size of the contingency to be announced this bimonthly. As an audit of the TCU (Federal Court of Auditors) published on Thursday (19th September), the result of the collection with the measure is of “frustration”.
“It’s time to see how the government will treat Carf, […] whether he will have a more optimistic hypothesis for the coming months or whether he will assume a more realistic hypothesis, that the potential of this measure is in fact lower than he had estimated for the entire year”it says.
In the case of an optimistic analysis, in which only a temporal shift in collections is considered, the government should reduce the estimated revenue from the measure from R$37.7 billion to something close to R$25 billion, says Sbardelotto. In this scenario, it is likely that the contingency announced in July will be maintained, without a new one.
According to the expert, however, in a realistic analysis, the government should reduce the estimated revenue from the measure to between R$5 billion and R$10 billion. He estimates that the change would require an additional contingency that could reach R$6 billion.
The likely hypothesis, however, according to the XP economist, is that the government will opt for a more optimistic premise.
Sbardelotto also expects the announcement of a block of at least R$5.5 billion in this two-month period, due to the higher-than-expected result recorded by social security expenses in July and August.
He adds that, if the government opted for a more prospective view, considering that there may be underestimated expenses until December, this necessary amount would be even greater, close to R$10 billion.
“What could reduce the size of this blockage would be a review of personnel expenses. We believe that these expenses are overestimated and that there would be some room for adjustments,” states. He says, however, that the government does not usually change this metric and “prefers to maintain a certain fat”.
For economist Matheus Pizzani, from CM Capitalthe government would need to set aside R$14.4 billion in this two-month period, including contingencies and blocking.
The calculation considers that the document should report a new frustration with the estimated collection at the beginning of the year, mainly related to Carf, and again a greater than expected impact on expenses. This, he says, should not be the last freeze announced.
According to Pizzani, further containment would be necessary for the government to reach the lower limit of the primary target. “I believe it would only come in December. We have elections now and everything. And even due to the nature of how this process is usually done, you often leave an even greater burden for the end of the year.”he says.
Given the failure to fully realize the revenues forecast in the 2024 Budget, the chief economist of Warren Investments, Felipe Salto also estimates that a new freeze would be necessary by the end of the year.
Salto’s calculations indicate an additional necessary containment of R$11.2 billion in discretionary expenses, in addition to the R$15 billion already frozen.
“Despite the very good performance of net revenue in the first 7 months of the year, we understand that the official projections will not be achieved”he says in a note. “We believe that this additional cut is feasible, so that the fiscal target should be met in 2024.”
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