May 19, 2022

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High inflation and low interest rates put public accounts in the blue - 31/01/2022 - Market

High inflation and low interest rates put public accounts in the blue – 31/01/2022 – Market

The reduction in Social Security, employee, and emergency aid expenditures is added to Increase in revenue due to higher inflation And state-owned earnings, the public accounts have prompted the first positive result in eight years in 2021. However, this pairing of factors should not be repeated in 2022, when the numbers should return to the red, as expected by the federal government itself .

Last year, federal, state and municipal revenue exceeded expenditures by R$64.7 billion or 0.75% of gross domestic product (GDP), taking into account the primary result – before debt interest payments.

A positive result has been the action of states, municipalities and state-owned enterprises at all levels of government. the Onyao ended the year with a deficit, although it was the lowest since 2014.

Total debt decreased from about 88.6% of GDP in 2020 to 80.3%, affected by the effect of inflation on nominal GDP. The trend in the next few years is rising debt.

In times of accelerating inflation, public accounts tend to improve, as revenue accompanies higher prices, while large expenditures are frozen throughout the year. This has been seen, for example, with Social Security and employee expenses.

Although the decrease in spending on emergency aid was fundamental to the decrease in public spending compared to 2020, When federal spending hit a recordAttention is drawn to the decline in Social Security, which returned to 2018 levels (8.2% of GDP). This is the first decline in major initial federal spending since the 2019 reform.

Detailed figures through November show that granting of new benefits has declined for the second year in a row. However, the total number of policyholders grew. The total amount paid by INSS was higher in nominal terms, but lower when considering inflation correctionwhich eroded the purchasing power of policyholders throughout the year.

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The second most important component, personnel expenditures, fell to the lowest level in the series that began in 2008 (3.8% of GDP). Spending on active-duty military personnel was stable only last year, while spending on civilians, inactive and retired people has declined. The civil servants’ salary freeze explains the result.

Data from the National Treasury shows that 79% of federal spending in 2021 was allocated to paying benefits (Social Security, employees, bonuses, unemployment insurance, emergency aid, etc.). The other 15% includes investments and expenditures related to device maintenance, with half of these expenditures being mandatory – for health – and the other half being allocated free of charge to the government.

In the coming years, it is expected that there will be a continuous decrease in expenditures, according to IFI forecast (Independent Tax Corporation).

Total federal government spending in 2021 was the lowest in seven years (18.6% of GDP) and may continue to decline in the coming years, mainly due to the increased emphasis on the share of non-compulsory spending, such as investments and maintenance expenditures. from the device.

The problem is that revenue is also likely to go down. Contributed by inflation and higher oil and other commodity prices, net revenues in 2021 returned to the level of 2019 compared to GDP (18.2%), with good results from taxes and from large profits paid by BNDES and Petrobras last. general.

As a result, the outcome at the federal (central government) level should fall short this year and in the next two years, according to market forecasts from the Focus Central Bank’s survey.

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Government fiscal spending is also expected to increase. In a year of high interest rates and inflation, debt spending rose from 4.18% to 5.17% of GDP, the worst result in three years, which also proved to be a challenge for debt management.

According to the international concept of debt comparison, Brazil still has the highest value among emerging countries.

Goldman Sachs says there is a reduction in financial risks in the short term due to factors that have improved the outcome of public accounts, but notes that the high level of indebtedness and the expectation of new deficits make the country vulnerable to external and domestic shocks. .

The institution says that putting debt on a downward trend and building new financial safety margins, following the change in the spending ceiling, are the main challenges facing the country in the coming years.

Rating agency Fitch Ratings says the result for fiscal year 2021 will not be repeated in 2022, due to weak economic growth, deteriorating primary balance, and higher interest expenditures.

The corporation highlights that revenue performance last year was driven by nominal GDP growth, higher commodity prices, and higher consumption of goods (more taxable) in relation to services (less taxed). It also highlights the return of BNDES loans to the treasury, which helped reduce indebtedness, with an impact of 1.1 points of GDP, according to central bank data.

XP expects a weaker public sector outcome (0.6% of GDP deficit) in 2022 and says there will be higher spending in both central and regional governments with the change in spending caps and the electoral cycle.

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“In addition, revenue will see a smaller margin increase due to lower commodity inflation and slowing economic activity. However, we set an upward trend for this forecast as commodity prices remained at high levels earlier this year.” , says Thiago Spardilloto, XP Economist.