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Fiscal issue may worsen inflation and economic activity, says FGV

The Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre) released this Tuesday (22) the November edition of the Macroeconomic Bulletin, which highlights the discussion on the fiscal framework that may be in force in the coming years.

According to the publication, this is the main theme of the current domestic debate and, the only certainty is that the public sector will have a deficit in 2023. However, the size of the deficit is not yet clear. “We may be far from the primary surplus needed to stabilize the public debt”, points out the report.

According to the Bulletin, the proposal for the PEC for the Explosion excludes expenditures that would total BRL 175 billion from the ceiling forever. In this account is the R$ 600 of the Auxílio Brasil, plus the R$ 150 for families with children up to 6 years old.

The study shows that extending the aid by BRL 600 and the additional amount would require around BRL 70 billion, an amount that does not fit within the spending ceiling, hence the need to approve an exception to the rule, the so-called “tax waiver🇧🇷

“But this is less than half of the claimed amount. That is, despite the rhetoric being that the exception is for social programs, around BRL 105 billion were already contemplated in the Budget and in the ceiling and it would be necessary to add only BRL 70 billion to the proposal”, emphasizes the Ibre Bulletin.

That is, direct spending will represent around 10% of GDP, to which will be added the interest that will be levied on the public debt that will have to be issued to finance this increase in spending.

consequences of waiver

Among the possible consequences of this permanent increase in spending, Armando Castelar, one of those responsible for the Bulletin, mentions greater inflationary pressure, both through the demand channel and also through the mechanism of increased country risk.

“This will lead to greater exchange rate depreciation, more pressure on current and future inflation, contaminating inflationary expectations. There will be no other way out for the monetary authority than to react, initiating a new cycle of monetary tightening or at least not going ahead with the interest rate cut that was projected for 2023”.

For Castelar, in addition to the negative impacts on economic activity, employment and tax collection, the country would experience an increase in interest expenditure on the public debt, making the public accounts picture even more difficult.

“We know that public spending decisions are political decisions. However, it is important to emphasize that if we want to spend more on social spending, we have to reduce other non-social spending and/or find new sources of tax revenue. The problem is not the necessary social spending, but how to finance it”, he analyzes.

economic downturn

As stated in the Macroeconomic Bulletin, activity slowed down in the second half of 2022. “We expect growth of 0.6% in the third quarter compared to the second; that is, half of what was recorded in the second quarter, which was 1.2%”, he shows.

At the margin, the expectation of increase, compared to the previous quarter, are in the GDP of agriculture and public services. “The protagonism continues to be the strong expansion of the services sector, which should grow 1.1%. This trend should continue in the last quarter of the year, when we project a contraction of 0.2% in GDP compared to the third quarter, which will lead to a growth of 2.7% for the year ended”, he points out.

For 2023, Castelar believes in a growth of 0.1%, due to the sharp revision in the GDP of agriculture, to an increase of 8%. “We expect GDP contraction in all other sectors, as well as, on the demand side, in household consumption”, he emphasizes.

domestic scenario

Castelar also reinforces that the economy in Brazil should slow down in relation to what has been happening, a reflection of a world economy that is starting to slow down, mainly in China.

He attributes this scenario to interest rates that begin to take effect via credit for families, culminating in default. This, according to the expert, should limit the expansion of the domestic economy. “We can also add that there is a cyclical effect in an election year, not only at the federal level, but also at the state level, which tend to spend more in that period. It takes the bills off track,” he points out.

The projections for the next year, as Castelar says, are more difficult to measure because of the newly elected government, making companies hold back on investment decisions to wait for more concrete results in the coming months and years.

“The trend is for a slowdown, but my forecast for 2023 is for stagnation, in addition to a small drop in GDP, as all causes, such as high interest rates, a drop in the global economy and limits on family credit, will extend” , concludes.

Source: CNN Brasil

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