How the Covid-19 emergency aid impacts Brazil’s finances

</p> <p>For Treasury Secretary Mansueto de Almeida, the idea is &#8220;<a href="https://www.istoedinheiro.com.br/mansueto-afirma-que-manutencao-de-auxilio-emergencial-e-fiscalmente-impossivel/">fiscally impossible</a>.&#8221; He told newspaper <em>O Estado de S.Paulo</em>: &#8220;Emergency aid is, as the name suggests, for emergencies only.&#8221;</p> <p>However, the thought of extending the aid has begun to gain traction in Brasília, as we have reported on our <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/05/20/brazil-may-extend-emergency-aid-but-slashing-benefit-to-brl-200/">Covid-19 Live Blog</a>. Even Economy Minister Paulo Guedes has publicly voiced the idea — with a crucial caveat, however. Mr. Guedes said an extension would mean workers would get only an additional of BRL 600 — paid either at once or in three BRL 200 installments.&nbsp;</p> <p>Extending the aid would impact at least the 60 million Brazilians that already had their benefits approved, according to Pedro Guimarães, chairman of state owned-bank Caixa — the institution managing social benefit payments in Brazil. But this might have even larger impacts, since another <a href="https://www.cnnbrasil.com.br/business/2020/05/19/e-impossivel-pagar-milhoes-de-pessoas-em-um-dia-diz-presidente-da-caixa">10 million people are still waiting</a> for an answer as of May 19.</p> <p>According to the economic team’s <a href="https://www.gov.br/economia/pt-br/centrais-de-conteudo/apresentacoes/2020/balanco-500-dias.pdf">projections</a>, the emergency aid for 54 million workers for over three months is already costing the federal government “at least BRL 123.9 billion” — or roughly the entire primary deficit target for the 2020 federal budget.&nbsp;&nbsp;</p> <h2>How much is the emergency aid program actually going to cost?</h2> <p>The Senate’s Fiscal Independent Institution (IFI), a reference for fiscal projections in the country, increased its estimates for the cost of the emergency aid from BRL 80 billion in April to BRL 154.4 billion in its <a href="http://www2.senado.leg.br/bdsf/bitstream/handle/id/571954/RAF40_MAIO2020.pdf">latest report</a>, published on May 18. Despite this major adjustment, it refers only to the cost for the first three months. “Right now, we are not factoring the extension in. But if that happens according to the current rules, expenses will jump by BRL 50 billion per month,” says the report.</p> <p>The idea of paying BRL 600 for three months, however, has been rejected by minister Guedes, who said the government has no money to keep the aid, also adding that it might postpone the social isolation for “eight years”, as life is currently “easy”.&nbsp;</p> <p>Estimates provided by BTG Pactual bank analysts add color to what might happen to the public debt in case the aid is actually postponed. The team, led by analyst Claudio Ferraz, considers the aid will be extended for another three months, up to September 2020.&nbsp;</p> <p>In their base case scenario, primary debt reaches BRL 940 billion for the year, eating up 13.5 percent of the country’s GDP. Considering only the central government accounts, the deficit could reach BRL 914.6 billion — BRL 500 billion of it related to expenditure measures such as emergency aid.&nbsp;</p> <p>In its latest macroeconomic fiscal report, the Economy Ministry still expects the primary debt to reach BRL 571 billion in 2020. But according to Economic Policy secretary Waldery Rodrigues, that number had already changed by May 13, when it became public. When contacted by <strong>The Brazilian Report</strong>, representatives of the Ministry informed an update will be provided on a new press briefing, without specifying a date.&nbsp;</p> <h2>Not the only one to blame</h2> <p>Besides the much-needed support for Brazilian workers, the economic team will have other impacts to consider before extending the benefit. So far, the ministry costs the entire fiscal hit of Covid-19-related measures at BRL 407.7 billion — 30 percent of it to the emergency aid — but the full package also includes funds to purchase health inputs, aid for states and municipalities, and support for companies.&nbsp;</p> <p>Also, the fiscal pitfalls created by Covid-19 are not only comprised of expenses but also by a blow on the revenues. Tax collection numbers for April show a <a href="https://www.infomoney.com.br/economia/arrecadacao-cai-29-em-abril-e-soma-r-101154-bilhoes-afirma-receita/">29-percent plunge</a> in federal revenues, to BRL 101.15 billion, the worst performance for the month on record.&nbsp;</p> <p>IFI also highlights that tax exemptions and postponements provided by the government will diminish the federal government tax collections by BRL 116 billion for the year. That being said, primary revenues are expected to reach BRL 1,376.8 trillion in 2020, a BRL 46.8 billion drop versus April projections.&nbsp;&nbsp;&nbsp;</p> <h2>Less revenue, more debts</h2> <p>As of March, the gross debt of the government (DBGG) had already increased by 1.7 percentual point, to 78.4 percent of the GDP. Given the bleak scenario, IFI expects it to end 2020 eating up 86.6 percent of the GDP, impacted by the worsening of both central government and consolidated public deficits — not to mention the GDP drop itself.&nbsp;&nbsp;</p> <p>IFI estimates the gross debt may now reach 100 percent of the GDP in 2026, instead of 2030, as previously expected. “These results represent a warning towards the need of taking steps to perform fiscal adjustments after the crisis and avoiding that actions and commitments assumed today become future expenditures”, they wrote.&nbsp;</p> <p>BTG Pactual analysts, that see DBGG reaching 96.3 percent of the GDP already in 2020, are also concerned about the government’s ability to keep up with fiscal responsibility rules. While they believe that the spending cap — that links the government’s expenditures to inflation growth — will be respected in 2020, they reckon that it will be an even more daunting task for 2021 due to the deflationary impacts of the pandemic.</p> <p>Per their calculations, expenditures must be slashed in BRL 5 billion to ensure compliance in 2021, while reductions should be of BRL 23.7 billion in 2022.&nbsp;&nbsp;</p> <p>“As of 2021, the challenge in maintaining a credible spending cap is thus substantial, and compliance is contingent on approval of measures that control growth in mandatory expenditures, particularly with salaries and income transfers”, they wrote.