Bolsonaro’s policy for “electoral return” worsens scenario, IFI says

President Jair Bolsonaro in Manaus: Policies seeking electoral return worsen economic scenario, IFI assessment says | Photo: Isaac Nóbrega / PR

Jair Bolsonaro’s government policies that could pay electoral dividends – like the Auxílio Brasil program and the PEC dos Precatórios, which would free up money for spending – are expected to worsen the public accounts scenario, warns the Independent Fiscal Institution ( IFI), linked to the Federal Senate.

Despite the improvement in the performance of the GDP and the primary deficit in 2021, the economic recovery is not consolidated, specifies the institution. Economic growth is expected to slow and inflationary pressures to persist in 2022, but not as strong as this year.

The appointment is made in the last budget monitoring report (RAF). The document is published monthly by the entity, with the aim of promoting the transparency of public accounts and contributing to budgetary discipline.

Auxílio Brasil, replacing Bolsa Família, the discussions on the new Refis – a payment in installments of the tax debt – and the PEC of the debts ordered by the court are considered by the IFI as the main measures likely to exceed the spending limit and , therefore, to worsen the fiscal situation. scenario. In the latter case, the proposal is to authorize decennial payments of precatório – debts resulting from court decisions -, which should reach in 2022 the amount of 89 billion reais.

In the same PEC, the government also wants to create a debt settlement fund, held exclusively by the Union, to pay installments and active debts outside the spending limit. There must also be some sort of ‘account matching mechanism’ within the fund, in which it will be possible to settle or negotiate commitments between the Union and the States. With the PEC, the government would reduce the budget, being able to invest in measures such as Auxílio Brasil.

“The attention of the IFI will be redoubled”, warns the institution, specifying that the measures of populist content could undermine the framework of the current budgetary rules and should have relevant effects on inflation, interest, the exchange rate , economic growth and public debt.

“On the verge of breaking the ceiling, the government wants to change the rules of the game. This is the main factor leading to an increase in risk,” explains Felipe Salto, executive director of the IFI. “Economic agents perceive this as a maneuver which can lead to incurring new and permanent expenditure.”

Pricing, according to Salto, is based on an increase in interest rates. “The curve ahead [longo prazo] the interest rate is already higher for all maturities. This risk premium is valued in the short term by the agents. Ultimately, this could affect the dynamics of public debt, ”he said.

The director general of the IFI cites other ingredients that increase the tax risk: “For example, in 2019, the transfer of rights was removed from the ceiling; this year, there was a change in schedule which allowed the postponement of salary bonus expenditure; the possibility of counting O [novo] Bolsa Família in the extract; and the income tax reform itself, which is not creative accounting, but is a change in the system that also undermines the risk assessment, especially due to the form of the last report, which is very bad and can generate a high tax hole “.

Regarding the expectation that government measures cease to prosper after warnings from institutions such as the IFI, Salto recalls that the entity has no judicial power, like the control bodies. “But our content has the power to annoy, and it must annoy. The presence of the IFI in the tax framework since 2016 fulfills this role. It has happened. [incômodo] in the reform of Social Security, in which we disclose to the government the calculations of the fiscal impact of each measure. Now it should be the same, ”he says.

Inflation and GDP

Expectations of the inflationary scenario are also of concern and, therefore, expectations relate to further increases in the base interest rate. The Extended Consumer Price Index (IPCA) accumulated a 9% increase in the 12 months leading up to July, and in 2022 inflationary pressures may still persist.

The IFI expects an IPCA close to 7% this year and sees possible consequences for next year, although the current estimate for 2022 is still a much more contained index. “The current more generalized inflationary pressure is reflected, therefore, by greater inertia for inflation 2022 (whose current projection is 3.5%)”, specifies the report of the institution.

Among the price risks are the federal government’s electoral bias policies, which could negatively influence economic activity itself, according to the IFI’s assessment.

“The search for space to accommodate policies with electoral feedback and the resulting deterioration in the perception of fiscal risk make it more difficult for the Central Bank to anchor inflation expectations to the risk and rate target. of interest, “warns the IFI. “The scenario of high and persistent inflation, the need to raise interest rates and uncertainties about external demand, in addition to the budgetary risk, indicate a more moderate evolution of the GDP”, estimates the RAF.

Also according to the report, base interest rates tend to be higher than expected in 2021, placing additional restrictions on medium-term growth dynamics. “The more restrictive movement in monetary policy is justified by the continued growth in market expectations for the IPCA,” he says.

As for the GDP, in the base scenario, the IFI estimates an increase of 4.2% in 2021; on the optimistic side, a performance of 5.4% of GDP, slightly better than that of the financial market, which projects growth of 5.27%. As for 2022, the report’s projection is for 2.1% lower GDP growth.

Variants of Covid-19 and the water crisis

In addition to the populist measures the government is betting on, the spread of variants of the coronavirus is expected to further worsen the economic scenario. At the same time, the risk of energy rationing, given the low level of the country’s hydroelectric reservoirs, undermines the confidence of agents and the performance of the country’s economy.

According to the IFI, even with the progress of the vaccination campaign in Brazil, “the percentage of people fully immunized (22.7%) is still far from the level considered safe or ideal, a fact that may affect the normalization of the disease. productive system in by the spread of more infectious variants of the coronavirus “.

“Some countries with higher vaccination rates have again recorded an increase in cases of Delta variant. In this sense, the pace of expansion of world trade, which has benefited the Brazilian economy throughout the year , could also be mitigated “, specifies the institution.

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