In the first half of 2022, the Union disbursed R$ 4.62 billion to pay off arrears of state debts. This amount represents an increase of 1.3% over what was paid in the first half of 2021. From 2016 onwards, the Union has already paid R$ 46.53 billion to honor loans to states and municipalities, according to the Report on Guarantees Honored by the Union , released by the National Treasury on July 7.
The current problem stems mainly from political decisions taken since 2007 by the federal government itself, when it facilitated credit for all entities to increase public investment, through the Growth Acceleration Program (PAC).
As guarantor of loans, the Union is obliged to make payments when the creditor defaults. After that, the process to recover the credit begins, which usually occurs through blockages in the State Participation Fund (FPE) or Municipal Participation Fund (FPM). However, according to the National Treasury page on the subject, preliminary injunctions issued by the Federal Supreme Court (STF) have been preventing the Union from executing counter-guarantees, which are precisely the way to recover the amounts paid.
“If, on the one hand, it is true that indebtedness increases the investment capacity of a government today, on the other hand, it compromises the future actions of that same government, due to the payment of the financial commitments assumed by the debt”, says the special page of the Treasury on the theme.
The argument is quite simple, but it has been repeatedly ignored by government officials in recent years. This is what one of the articles in the collection of articles “Not to forget: public policies that impoverish Brazil” points out, organized by economist and researcher at Insper Marcos Mendes.
In the chapter “Stimulating the indebtedness of states and municipalities”, Acauã Brochado and Itanielson Cruz, both National Treasury control auditors, show the mistakes made in the financing of subnational entities, which in recent years have reached a situation of financial deterioration and even insolvency. , in some cases.
Euphoria with the Cup and political vision facilitated loans
The authors make a brief history of regional accounts and point out that at the turn of the century, the largest debt renegotiations of states and municipalities in Brazilian history took place, which reached almost 15% of the country’s GDP. From there, most of the debt of these entities started to have the Union as creditor. With the Fiscal Responsibility Law (LRF) of 2000, legal constraints were created that made indebtedness difficult and there was “a successful incentive for fiscal adjustment”, the authors say.
However, from 2007 onwards there was a significant change in the course of this policy. According to them, the federal government started from the premise of development via public investment, which would contribute to economic growth, in order to increase collection and guarantee payment of the contracted debt.
At that time, the PAC was launched and Brazil’s preparations to host the 2014 World Cup also began. Government officials acted dominated by an expectation of constant growth – poorly based on the discovery of the pre-salt layer – and demanded more funding. With the Union as guarantor, based on the legal framework created by the LRF, it was assumed that the contracts would be respected.
The authors explain that one of the main requirements to receive guarantees from the National Treasury was to have a good score in the ability to pay (Capag), but that this could be relaxed if the Ministry of Finance concluded that the operation was relevant to the Union – in this case , entities with a “C” or “D” grade had no difficulties in obtaining loans, even with fiscal indicators well below those with an “A” or “B” grade.
“To get an idea of the use of Capag’s exceptionalization institute, between 2012 and 2014, the Ministry of Finance granted a guarantee to entities with Capag “C” or “D” in the total amount of BRL 87 billion. This amount surpassed the credit operations of those classified as “A” or “B” in the same period, which contracted R$ 68 billion”, they write.
On another front, the Union capitalized on federal public banks to increase the supply of credit, mainly through Caixa Econômica Federal and the National Bank for Economic and Social Development (BNDES), in addition to working with multilateral organizations, especially the World Bank and Inter-American Development Bank (IDB).
These actions were reflected in numbers, the article shows: the annual average of claims for credit operations by states and municipalities between 2002 and 2007 granted by the National Treasury Department was R$ 4.5 billion; in 2008, this amount rose to R$ 18 billion; and in 2013 it reached R$ 75 billion. In the period from 2008 to 2014, the annual average was R$ 36.4 billion, eight times more than the annual average of the previous period.
“At the end of the last decade, however, the combination of economic crisis, fiscal war and growth in personnel expenses in some entities reduced the ability to accommodate interests in the budget. The importance of cash flow problems, which often occur even in entities with apparently healthy usual fiscal indicators, was underestimated. As a result, the state or municipality may have good indebtedness and primary result indicators, but be unbalanced”, the authors explain. In addition, the great access to credit did not cause increases in public investment either.
Around 2015, the Union acted to restrict credit to states and municipalities and reduce the Union’s exposure, precisely at a time of economic crisis and strangulation of revenues. The authors point out that several subnational entities (states and municipalities) began to judicialize the refinancing and guarantee contracts of the Union in order to reduce their payments. This is the scenario described in the first lines of this text, regarding the National Treasury’s expenditure on unrecovered guarantees.
“Other important sufferers were states and municipalities in good fiscal situation, which saw the total amount of available credit decrease, despite being able to contract new operations”, highlights the article, showing the burden on society as a whole.
In an attempt to obtain revenue outside the constraints created, several subnational entities began to adopt unorthodox practices, according to the National Treasury’s control auditors.
“There were also, especially between 2012 and 2017, cases in which the state or municipality changed the structure of the civil servants’ pension scheme funds to allow the expenditure of accumulated resources in capitalized funds and, thus, reduce the contribution of resources from the local treasury to cover current pension deficits. Finally, the last example of unorthodox financing was the withdrawal of resources from administrative or judicial deposits. Especially in the case where the state is not a party to the litigation,” they wrote.
Brazil needs to resume fiscal rebalancing
The authors warn of the need to avoid new policies that resort to the same errors described, to give credit to entities in a fragile fiscal situation. For them, it is necessary to gradually improve the Union’s control systems, focusing on “creating escape valves in debt restrictions so that serious cases have orderly solutions”; and design adequate incentive mechanisms to reward prudent and responsible subnational entities. “In any case, transparency about the fiscal situation and the actions of governments is a fundamental condition”, they conclude.