Surplus needed to stabilize debt is 1.5% of GDP

A IFI (Independent Fiscal Institution) of the Senate said this Thursday (April 18, 2024) that the annual primary surplus necessary to stabilize the trajectory of Brazil's gross debt is 1.5% of GDP (Gross Domestic Product). Here is the full statement (PDF – 304 kB) and the report (PDF – 3 MB).

The government Luiz Inácio Lula da Silva (PT) worsened the targets set out in the fiscal framework, approved just over 7 months ago in Congress. Now, the objectives are: 0% in 2025, 0.25% in 2026, 0.5% in 2027 and 1% in 2028.

According to the IFI, therefore, the third term of the Lula government will not reverse the upward trend in public debt. Currently, DBGG (Gross General Government Debt) is 75.6% of GDP. In terms of value, it rose by R$1.077 trillion during the Lula government.

In addition to the targets that are already below what is necessary, the IFI stated that there are “many doubts” on the feasibility of zeroing the primary deficit in the 2024 accounts. The report shows that there was frustration in revenues and an increase in expenses, which exceed the tolerance margin of this year's fiscal target, which allows for a deficit of up to 0.25% of GDP .

The IFI survey was based on an average annual real growth of 2% and implicit real interest of 4.1% per year. The IFI estimates a consolidated public sector primary deficit of 0.8% of GDP in 2024. “The fiscal effort necessary to stabilize the public sector’s gross debt as a proportion of GDP would be 2.1 percentage points, equivalent to R$270 billion”said the IFI.

The institution also said that the first impressions of the PLDO (Budget Guidelines Bill) of 2025 are of measures that “tend to affect the credibility of tax policyl”. “The perception is that the effort to seek the sustainability of public accounts in the medium term has been postponed”he declared.

According to the IFI, the loss of credibility of the framework's fiscal rule could “bring consequences to the domestic economic environment”. The perception of fiscal fragility in a context of continued contractionary monetary policy in the US for a longer period of time may mean that basic interest rates (Selic) do not fall as much. The reason: the inflationary pressures that will arise with a higher dollar.