Agência Brasil explains the difference between the new framework and the spending cap

Last Wednesday (5), the Minister of Finance, Fernando Haddad, stated that the Union would have to cut R$ 30 billion in mandatory expenses in 2024, if the ceiling was maintained. According to him, the cuts would affect not only discretionary (non-mandatory) spending, such as water, electricity, internet, office supplies and telephone, but would also affect social programs.

“If the spending cap is maintained, we would no longer have to cut discretionary spending. We would have to cut BRL 30 billion from mandatory expenses if (the ceiling) were maintained from 2024. To subsidize funding?”, explained the minister at an event to an investor bank.

To understand what will change with the new framework, it is necessary to understand the process that led to the infeasibility of continuing the spending cap.

spending cap

Promulgated with a forecast to last 20 years, the federal spending ceiling limits the growth of primary spending by the Union due to inflation accumulated by the Extended National Consumer Price Index (IPCA). Expenses incurred in 2016 are now corrected by the indicator every year, with inflation being applied over the previous year’s limit.

The Constitution allows the ceiling to be exceeded in some cases: extraordinary credits (related to emergency expenses), capitalization of state-owned companies not dependent on the Treasury (mechanism used to solve financial problems or prepare companies for privatization), expenses of the Electoral Justice with elections and mandatory transfers from the Union to states and municipalities.

Within the global limit, there are limits for the Executive, Legislative, Judiciary, Federal Public Ministry and Federal Public Defender, with some bodies within these categories also obeying sub-limits. Until 2019, the Executive branch compensated for any shortcomings of the other powers in a transition schedule.

According to the spending ceiling, in 2026 the index would be revised, and may be higher than inflation. Until 2020, the correction was made based on the Extended National Consumer Price Index (IPCA) between July of two years before and June of the previous year. With the Constitutional Amendment of Precatorios, enacted in 2021, the index began to consider the full inflation of the previous year.

Between January and June, the effective inflation of the first semester is valid. From July to December, it’s worth a projection for the IPCA, a value that is compensated when the full index of the previous year is published, in January of the following year. At the time, the change was aimed at releasing BRL 64.9 billion in the 2022 Budget, an election year.

Unlike other countries, the Brazilian spending ceiling does not have escape valves such as exclusion of investments (public works and purchase of equipment) and social spending from the rule. Another possibility of escape is the suspension of the rule in times of low economic growth, as in Peru.

In the neighboring country, a country that has adopted a spending ceiling since 1999, spending is not simply corrected for inflation. Expenses may have real growth (above inflation) of 2% in the first years and 4% from 2004 onwards.

Constitutional Amendment of the Transition

With no escape valves in Brazil, the Constitution has been modified several times since 2019 to allow holes in the spending ceiling, involving BRL 828.41 billion outside the limit. Of this total, most corresponded to the War Budget to face the covid-19 pandemic in 2020. It was BRL 507.9 billion, according to calculations by economist Bráulio Borges, from the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV-Ibre ).

With the release of BRL 108.46 billion by the Constitutional Amendment of Precatories and another BRL 41.2 billion with the Constitutional Amendment that raised the Brazil Aid to BRL 600 and created aid for taxi drivers and truck drivers, the spending ceiling would burst in 2023. To avoid the paralysis of this year’s Budget, the elected government articulated the approval of the Constitutional Amendment of the Transition.

Enacted in December last year, the Constitutional Amendment of the Transition excluded up to BRL 168 billion from the spending ceiling in 2023. Of this total, BRL 145 billion correspond to the new Bolsa Família with a minimum value of BRL 600, and up to BRL 23 billion could be spent on investments if there is excess revenue.

In exchange for creating yet another hole in the spending cap. The text, however, established the obligation for the government to send – by August this year – a complementary bill with a new fiscal framework to Congress. In order to allow the 2024 Budgetary Guidelines Law (LDO) project to be sent by April 15, the date established by the legislation, within the new framework, the government decided to anticipate the disclosure of the new rules.

New fiscal framework

Introduced March 30, the new tax framework it combines rules of primary result (result of government accounts without public debt interest) and expenditure control. Government expenditures may grow between 0.6% and 2.5% above the previous year’s revenue in real values ​​(adjusted for inflation).

Within this band of 0.6% and 2.5%, expenditures may grow by up to 70% of the revenue variation of the previous year. According to the National Treasury, the limit will consider net revenue, when mandatory transfers to states and municipalities are deducted from Union revenues.

Although expenses are subject to a growth cap, there are marked differences in relation to the current spending ceiling. First, expenditures are linked to revenues, which creates a pro-cyclical character for the new fiscal framework, in which expenditures grow more when the government collects more and fall when collections decline. In Brazil, the spending ceiling is countercyclical, limiting spending when tax collection increases and, as it has no escape valves, it is pro-cyclical in times of recession, because spending also decreases when the economy contracts.

The second difference concerns growth. With the spending ceiling, expenses could not grow above inflation. Under the future fiscal framework, spending will always grow more than inflation. In times of recession or low growth, they will grow less, but still above the IPCA.

Definition

This holiday, the Ministries of Finance and Planning are defining the period to be taken into account to correct the recipe. Initially, the two folders had stated that the range would consider revenue between August of the previous year and July of the current year.

However, later, the Secretary of the National Treasury, Rogério Ceron, informed that the interval will be between July of the previous year and June of the current year, to give the government time to prepare the budget project for the following year within the new limits. The correction period will only be known after sending the final text to Congress

In addition to the spending limit, the new framework provides for primary result targets that may be set every four years in each presidential term. With a tolerance margin of 0.25 percentage points, more or less, the government forecasts a primary deficit of 1% of Gross Domestic Product (GDP) in 2023, zero result in 2024 and a surplus of 0.5% of GDP in 2025 and of 1% in 2026. If the lower limit of the band is not complied with, there will be an automatic mechanism of punishment, which will reduce the growth from 70% to 50% of the revenue variation in the following year.