Economics: Misplaced budgetary optimism
In the second part of our analysis of the government’s 2020 budget package, we assess the outlook for public sector balances, as well as the revenue and expenditure levels of the proposed Federal Revenue Law and the Federal Spending Bill.
While the government is projecting only slight increases in the primary balance and public deficit, it seems unlikely it can deliver on those targets for a number of reasons. For starters, it appears officials are seriously overestimating the country’s crude oil platform and oil exports. If so, the resulting shortfall in petroleum revenues could expand the public deficit while weakening the primary balance to the same degree, although that impact could be somewhat offset by the current rise in oil prices.
But if the current geopolitically driven upswing in crude prices should hold, the government would have to downwardly adjust excise tax rates in order to meet its commitment not to allow gasoline prices to outpace consumer inflation; according to our calculations, such adjustments to the prices charged for these fuels could shave around 30 billion pesos off projected excise tax revenues, which the budget projects will expand by a real 6.7%, with roughly two-thirds of that amount attributed to these two fuels.
Moreover, we believe the administration is also overestimating next year’s VAT and income tax revenues due to its overly bullish GDP expectations; we calculate the shortfall in both tax lines could be somewhere between 41 and 104 billion pesos, depending on the extent of GDP growth.
Potential sources of public deficit pressure could also result from the budget's underestimating public debt-servicing costs, a degree of excessive optimism that could be undermined by a proposed increase in the rate at which interest on investments is withheld. The combination of overestimating revenues and lowballing debt costs could push the 2020 fiscal deficit and primary balance targets out of reach.
Another point of concern involves the extent to which programmable spending and the investment budgets of the vast majority of areas of governmental administration are to be slashed, including the major ministries and those that have traditionally served as significant public investment implementers, and the extent to which these could further limit economic growth.
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