With inflation ‘push’, States are approaching 2022 with full coffers


With the push of inflation taller, the governors have much fuller coffers in the anteroom of the 2022 election campaign. From January to May this year, the level of collection has already surpassed by R$ 45.1 billion the result obtained in the same period of 2019, before the covid-19 pandemic.

As there are legal restrictions on increasing mandatory spending by the end of 2021, the trend is for states to use the fullest box next year, when governors want to show service in an election year after the hard times of the pandemic. One of the risks pointed out by experts is that governors will use this surplus to increase permanent expenses in 2023.

Until May, the collection of Tax on Circulation of Goods and Services (ICMS), state tax and main source of revenue for governors, reached R$ 250 billion, with a real increase (above the inflation measured by the IPCA, official index) of 11%. About 2020, when the pandemic dropped the collection, this year’s revenues rose R$ 50.6 billion, an increase of 16% (see the increase for each state on the side).

The ICMS collection data from January to May were gathered at the request of the State, by the Brazilian Federation of State Tax Inspectors Associations (Febrafite) based on the electronic invoices issued.

Driven by the international boom in the commodities (basic products), Mato Grosso, which is a food producer, is at the top of the list of states with the highest growth in ICMS collection, 41.2% in the first five months of the year. The State of São Paulo, the country’s largest economy, collected 8.7% (R$ 12 billion) more compared to 2019, reaching R$ 72 billion.

The recovery of state tax revenues also follows the federal government’s tax revenue, which has already grown R$ 96 billion compared to 2019 and R$ 156 billion over last year’s result in the first five months of the year.

“Looking at the political aspect, the tendency is for governors to make money to spend in 2022, which is an election year”, predicts the president of Febrafite, Rodrigo Spada. According to him, 2022 is a year in which governors want to have a higher cash flow and will seek to deliver works in the first half.

Spada says that the States will seek to keep the cash because Complementary Law 173 (which established the rules for federal aid to federation units) prohibits the increase in mandatory expenses until the end of this year and also froze the salary readjustments of public servants of the Union, States and Municipalities.

Salary adjustments

As a recent report by Estadão showed, many states and municipalities have already contracted adjustments for next year. In addition to the cities of São Paulo and Manaus, at least seven states have readjusted or opened the way for increases in civil servants this year, despite the legal restriction, according to a survey carried out by the newspaper.

Spada warns, however, that there is no certainty that the States are coming out of the crisis because this recovery in revenue is due to the increase in inflation, especially the IGP-M, which is used to correct rental prices. He points out that, despite the increase in revenue, the number of invoices issued did not increase in 2021, compared to last year.

“That means they didn’t have much more business. It was the prices of those deals that increased significantly.” He explains that, with higher prices, the States collect more because ICMS is charged on a percentage of the sales value of the products.

The president of Febrafite considers that it is a collection that results from inflation, the worst “tax” that exists for the low-income population. He recalls that with saltier inflation, state expenses also grow. ICMS is one of the main thermometers of economic activity because the company sells the product in a month and at the beginning of the following month it has to make this calculation and pay the tax.

temporary gain

Specialist in state accounts and consultant at Febrafite, economist Vilma Pinto assesses that this improvement in tax revenue is temporary and not structural, due to the cycle of commodities (commodities, such as food, oil and iron ore) and relevant inflationary effect. “It will be risky and reckless to make an increase in mandatory spending,” she says, due to two new laws, which require more counterpart adjustments to the governors’ accounts. Vilma will take on a position in the direction of the Independent Fiscal Institution (IFI) in the next few days.

Ana Paula Vescovi, former secretary of the Treasury, warned that the positive perception of the temporary cycle of high commodity prices could give rise to a vision of more spending money than the country actually has. “The risk is that the fullest cash flow for the federal government, states and municipalities will turn into permanent expenses right away,” said Vescovi, who is chief economist at Santander and also a specialist in state accounts.

Investments in SP

O Secretary of Finance of São Paulo, Henrique Meirelles, states that the State will take advantage of the increase in revenue to increase investments this year and in 2022. Former Finance Minister in the Michel Temer government, Meirelles emphasizes that there is a scenario of underinvestment in Brazil that needs to be reversed.

Large works, such as the Panorama and Litorânea highways, he says can be done through concessions. Therefore, the focus of investments will be in the area of ​​health, safety and education. “This increase in revenue is very necessary precisely for this investment to be made”, says Meirelles, who forecasts a growth in the Gross Domestic Product (GDP) of São Paulo of 7.8% in 2021.

He says that there is no discussion of raising civil servants’ salaries for 2022. “There is no discussion about it. There is no such demand. I don’t believe it,” he says. Meirelles says that the electoral risk on state finances will depend on the attitude of each governor. And it highlights that the state’s tax revenue also reflects the new economy, such as e-commerce, which grew a lot in the pandemic.

According to the Finance Secretary of Alagoas, George Santoro, the increase in tax revenue reflects the rise in fuel, energy, civil construction and food prices in the first half of the year. “I believe that state spending will be pressured in the second half and next year,” he says.

The secretary admits that it will be difficult at least not to restore inflation for civil servants in an election year, as happened in 2021. Santoro considers, however, a great fiscal risk to use this increase in collection with permanent expenses, as benefits for the civil servants. In 2021, he forecasts more than doubling investments to reach R$ 2.3 billion, compared to R$ 1 billion in 2020. “The cash is very high”, he says.