Instead of saving, the government uses extra oil money to spend more

The federal government is using extra oil revenue—from the expected revenue from the auction of adjacent pre-salt areas—to free up budget space and spend more.

On Tuesday (22), the Finance team announced the unfreezing of R$20.6 billion in this year's Budget. A large part of the increase in revenue that justified the unfreezing comes from the money that the government expects to raise with the concession of oil fields.

However, these revenues are non-recurring, meaning they do not alleviate the public finances' medium- and long-term problem, which is characterized by structural expenditures that grow faster than revenues, resulting in mounting debt. Furthermore, even with the additional resources, this year's public finances will close with a primary deficit, at the lower limit of the target.

According to Warren Investimentos, the problem with the current budget contingency is "using non-recurring revenue from oil sales to spend more." The investment manager believes the ideal scenario would be to postpone the oil sales revenue until 2026 and maintain the current budget contingency.

"Next year will be much more challenging for meeting the fiscal target than this year. Relying [in 2026] on revenue gains resulting from the approval of Provisional Measure 1,303 [which addresses the taxation of investments] or the cut in tax benefits seems very risky," the manager states in a note.

At the end of May, the government had frozen a total of R$31.3 billion in the 2025 budget to meet its fiscal target. Of this total, R$20.6 billion were contingencies, which could be reversed throughout the year, and R$10.6 billion were freezes—permanent cuts. Now, virtually all of the contingency has been reversed, and the freeze has fluctuated slightly from R$10.6 billion to R$10.7 billion.

If there is no change of course, the situation is likely to worsen. According to forecasts in the 2026 Budget Guidelines Bill (PLDO), by 2027 the government will have no fiscal space for discretionary or freely manageable spending, including the minimum spending for health and education, and parliamentary amendments.

Lower limit of fiscal target becomes pretext for spending more

According to Warren, by releasing R$20.7 billion, the government of Luiz Inácio Lula da Silva (PT) confirms its commitment to only the lower limit of the fiscal target for 2025, instead of targeting the center of the target.

The official target for the year is a zero primary deficit, but there is a tolerance for a deficit equivalent to up to 0.25% of GDP. This margin represents the possibility of a deficit of up to R$31 billion this year, not counting expenses that are excluded from the target. After Tuesday's unfreezing, the government estimates it will close the year very close to that, with a deficit of R$26.3 billion.

Therefore, there was no interest in leveraging the extra revenue to meet the core target of a zero deficit. The increased revenue will be used to free up more spending, rather than to curb rising public debt.

"We understand that this decision was wrong," Warren says regarding the release of contingency. The manager believes that the decision will not prevent the achievement of the 2025 fiscal target, as the sale of oil has already been approved by Provisional Measure No. 1,291, and there will be enough time to conduct the auctions. Furthermore, income tax revenues have evolved well until June.

Even with oil, the government will have a deficit of R$74.9 billion

If confirmed, the total primary deficit expected by the government for 2025 – of R$74.9 billion, or 0.6% of GDP – will be higher than the negative balance of 0.37% of GDP observed in 2024.

The government can only meet the lower limit of the target (a deficit of up to 0.25% of GDP) because part of the expenses – with court-ordered payments, for example – are not included in the accounting records.

The fact is that, even if the government formally meets the target using the tolerance margin, the repeated deficits inevitably inflate public debt, as it is necessary to issue bonds to cover the negative balance.

"The stability of the high public debt requires moving as quickly as possible towards a surplus above 2% of GDP," calculates Warren.

In its assessment, Warren also issues a warning to the government: "Another problem we see is implementing fiscal policy with a focus on the lower bound of the fiscal target. This lower bound was introduced to account for unpredictability. It should not be used to accommodate more spending," it states.

In the 29 months of Lula's administration through May, there were deficits in 23 of them, according to Central Bank data. As a result, public debt jumped from 71.7% of GDP in December 2022 to 76.1% in May of this year.

Oil auction was already a bet to boost revenue and spend more

As shown by Gazeta do Povo , even before all the dispute with the National Congress over the maintenance or reversal of the IOF increase, the government was already targeting oil auctions to raise cash and reduce the cuts made to the Budget, that is, to spend more.

To this end, in May the Executive sent Bill 2632/25 to Congress, which authorizes Pré-Sal Petróleo (PPSA) — a state-owned company created in 2010 exclusively to carry out the public sale of the Union's share in areas under a sharing regime — to auction these volumes.

The bill was shelved, and the text referring to the distribution auctions was inserted into the Social Fund Provisional Measure, already approved by Congress and signed into law by Lula. Initially, the initiative's revenue forecast was between R$15 billion and R$37 billion.

Due to fluctuations in oil prices on the international market, the Ministry of Mines and Energy maintained its revenue expectations at a lower level, reaching R$14.78 billion. The auction was an alternative proposed by the ministry to alleviate budget constraints.

Additional revenue has a fragile base and depends on volatile commodities

This amount makes up a significant part of the extra revenue recorded by the government and used to justify the recent unfreezing.

According to data from the Primary Revenue and Expenditure Assessment Report for the 3rd quarter, released this Tuesday, the government's net revenue was revised upwards by R$27.1 billion.

This net increase was primarily due to three factors: R$17.9 billion from the sale of surplus oil from the Pre-Salt layer, including areas not granted or shared; R$12.2 billion from income tax; and R$10.2 billion from IOF (Financial Operations Operations). In other words, oil revenues account for the majority of the revenue that drove the increase in revenue.

According to the Eixos agency, of the total estimated revenue from oil:

• R$14.78 billion comes from the Union's participation in the auction of non-contracted areas, which will be held in November;
  
• R$1.7 billion comes from increased revenue from the additional sale of oil from the Jubarte fields, following approval by the ANP of the Production Individualization Agreement (AIP) last week;
  
• R$1.7 billion comes from increased production from fields under the production sharing regime; and
  
• R$0.28 billion is a discount in revenue due to adjustments in expected revenue from royalties and special participations.
  

Dividends from state-owned companies enter the radar to boost cash flow

In addition to resources from oil, the government's strategy to spend more also includes an increase in dividends distributed by state-owned companies.

The measure requires, above all, technical and political negotiations with state-owned companies. For example, in March of this year, Petrobras presented retained earnings reserves of around R$20 billion, and BNDES, R$16 billion.

Both amounts could have percentages paid to the government as supplementary dividends. However, in this case, it will be necessary to consider the provisions of the State-Owned Enterprises Law to try to scrape the bottom of these reserves.