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Public accounts threaten states' financial recovery, warns National Treasury study

Fiscal crisis

Finance Bulletin released Wednesday shows only 10 states can receive Union guarantee for new loans

Although the trajectory of intense financial deterioration of states and municipalities since 2015 seems to have eased in 2018, this has occurred very unevenly, with some improving their finances while others aggravating their financial difficulties.

The data were presented this Wednesday (14/8) by the National Treasury, linked to the Special Secretariat of Finance of the Ministry of Economy, which launched the fourth edition of the Subnational Entities Finance Bulletin , published annually since 2016.

The current version analyzes the tax information of the states, Federal District and municipalities in aggregate form; the fiscal situation of state capitals in 2018 through nine indicators; Payment Capacity (Capag); also presents the Fiscal Recovery Regime (RRF) and the Fiscal Balance Promotion Plan (PEF); and, finally, addresses issues related to federalism and the fiscal sustainability of entities.

Taking into account Capag's analysis, only 10 states have, in 2019, grade A or B, which allows the entity to receive guarantee from the Union for new loans.  

The number of eligible states decreased from 2018. According to the table below, only Espírito Santo is currently rated A.

Of the remainder, nine are rated B; 14 with grade C; and three (Minas Gerais, Rio Grande do Sul and Rio de Janeiro) with grade D. The chart also shows that Rondônia and Amapá worsened their grades (from B to C between 2018 and 2019). Piauí improved from C to B.

The fourth edition of the newsletter draws attention to the fact that some states, besides having low current savings, have low cash availability. The warning is especially useful for Acre, Pará, Paraíba, Piauí, Paraná and São Paulo, which are close to losing grade B, since the ratio between Current Expense and Current Revenue is already very close to the tolerable margin of 95%.

"For these states, a greater effort is needed to increase revenue and cut spending because the grade could be lowered to C as early as next year," the report said.

Social security

The National Treasury report also emphasizes the need for states and municipalities to be included in pension reform. The measure is cited as "fundamental to fiscal health and social justice."

But at the same time, it requires the counterpart: that local governments strive to enact laws that reduce inactive spending, offer more robust public policies, and improve the services already offered, namely: primary and secondary education, care to health and public safety.

The recommendation comes with another caveat: Some states believe that they are solving their cash flow problems due to recent court decisions.

But this relief is temporary, guarantees the study published by the Ministry of Economy. And if measures are not taken to permanently bring about positive change, the short-term aid that may come could have the opposite effect: it will eventually worsen the public accounts crisis.