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Itaú Provides View On New Fiscal Framework

BRAZIL
  • Itaú have listed the following as positive points of the new framework announced on Thursday:
  • (i) its broad scope, with well-defined exceptions for the rule;
  • (ii) the challenging, but positive, expected trajectory for the primary result,
  • (iii) the use of actual revenues to index expenditure growth, as opposed to projected ones,
  • (iv), to a lesser extent, the mechanism of tightening the adjustment in the event of non-compliance with the lower band of the primary target.
  • A final positive point is that if the primary result surprises positively, the amount exceeding 70% may be channelled to finance investments.
  • Going forward, Itaú highlight the main challenges are related to the implementation of the targeted primary trajectory and consequent gains in credibility and consolidation of the rule. Achieving a balanced primary result in 2024, given the prospect of an economic slowdown, requires a revenue increase of around 1.5% of GDP, which, according to the Ministry of Finance, should be focused on eliminating tax distortions. Proposing, composing, and approving these measures and the tax reform will be of paramount importance.
  • A point of caution is that initiatives to increase revenues at a time of economic slowdown may be offset by allowing higher expenditures, given their linkage to revenues.
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