The state of public accounts

Image: Burak Kebapci


The problem is not in the public accounts, but in the weakness of economic activity

Ask, reader, economists linked to the market what is the main macroeconomic problem in Brazil. Nine out of ten will answer, I believe, that it is the “fiscal risk”, that is, the problematic situation, some would say disastrous, of the public accounts. Does it fit? Well, there is some truth to that. The fiscal difficulties are undeniable. But is the issue of public accounts really the main problem? Is it worth talking about a calamitous situation?

The government accounts data for the year 2021 have just been released. The Central Bank consolidates and regularly publishes this data. It is worth examining them and confronting them with the rhetoric that dominates media and financial market economists' assessments. The statistics I am going to mention concern the consolidated public sector, that is, the public sector as a whole, including the central government, state governments, municipal governments and state-owned companies (except Petrobras and Eletrobras).

The first point that calls attention: the primary result of the public sector showed a notable improvement in 2021. In 2020, the initial year of the pandemic, the primary deficit – defined as the total (or nominal) deficit minus interest expenses – reached the mark of 9,41 .2021% of GDP, an exceptionally high number, which reflected measures related to the pandemic and the recession that hit the Brazilian economy that year. In 0,75, however, the public sector registered a primary surplus of 10% of GDP, an improvement of more than XNUMX percentage points of GDP in just one year. Not bad for someone who is in a “dramatic” or “calamitous” situation.

The result evidently reflects the decrease in spending on the pandemic. There were, in addition, containment measures that were not always sustainable and positive (compression of public investment, for example). And the improvement in primary accounts also reflects the effect of the recovery in the level of activity on inflows, which grew sharply in real terms.

Public sector net interest expenditure rose from 4,18% of GDP in 2020 to 5,17% in 2021. The total deficit (primary deficit plus interest expenditure) thus fell from 13,59% of GDP in 2020 to 4,42% of GDP in 2021. It should be noted that interest expenditure and therefore the total deficit, calculated in nominal terms, include an inflationary or monetary correction component. This component was significant in a year like 2021, which recorded inflation of 10% as measured by the IPCA. Thus, a total deficit of 4,42% of GDP should not be considered too worrying.

Another way to arrive at this conclusion is to look at the path of public debt as a percentage of GDP. In net terms, that is, after deducting public sector assets, debt fell from 62,5% of GDP in December 2020 to 57,3% of GDP in December 2021. The drop reflects nominal GDP growth (inflation and real growth), currency devaluation (given that the public sector is a net creditor of foreign currency and benefits from the appreciation of the dollar) and the small primary surplus. These factors were only partly offset by nominal interest expenditure.

Financial market economists prefer to focus on gross debt, without taking into account the assets (mainly international reserves) held by the public sector. Not the best, in my opinion. Anyway, the evolution of this indicator was also favorable. The gross debt of the general government (federal government, INSS, state and municipal governments) fell from 88,6% of GDP in December 2020 to 80,3% in December 2021. to 100% of GDP.

Where is the drama then? Perhaps in expectations for the 2022 election year? It is feared, with some reason, that the Bolsonaro government will cause great damage to public accounts in its desperate fight for re-election. It might happen. It should be noted, however, that the market projections, collected weekly by the Central Bank, still do not support this scenario. The median of projections indicates a primary deficit of 1% of GDP for the consolidated public sector in 2022. The nominal deficit rises to 8,2% of GDP, due to the increase in interest rates promoted by the Central Bank. Net debt is projected to rise to 62,4% of GDP, returning to the level of 2020. Unfavorable evolution, but not alarming.

The truth is that there is a lot of exaggeration in what is said about fiscal risk. Public accounts cannot be neglected, of course. But nothing suggests that the government that will start in 2023, possibly a new Lula government, will have to make a dramatic fiscal adjustment.

On the contrary, with the economy stagnant or in recession, the most reasonable thing is for the new government to promote some fiscal expansion to get the economy moving. An effective way to do this is to increase social transfers, putting money in the hands of those who need it most and who, at the same time, spend everything they receive, generating a higher multiplier effect in the economy.

However, efforts should be made to remove the constitutional spending ceiling, which immobilizes fiscal policy, replacing it with a flexible fiscal rule outside the Constitution. This would allow boosting the economy through taxation, while at the same time signaling a medium-term commitment to responsible handling of public accounts.

If the new government is successful in this regard, the adjustment of public accounts will take place in a positive way, with an increase in tax collection induced by the recovery of the economy.

In reality, reader, the main macroeconomic problem is not in the public accounts, but in the weakness of economic activity. With the atrophied economy, there is no way to reduce high unemployment, underemployment and poverty. Putting the economy in motion, through fiscal policy, will contribute to increasing job opportunities and, at the same time, will facilitate the very control of government accounts.

*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. He was vice-president of the New Development Bank, established by the BRICS in Shanghai. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).

Extended version of article published in the journal Capital letter, on February 4, 2022.


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