BC president says fiscal framework avoids lack of debt control

The president of the Central Bank, Roberto Campos Neto, said today (5th) that the fiscal framework announced last week will avoid a lack of control of the public debt. “What has been done so far eliminates the tail risk for those who thought that the debt could have a more explosive trajectory”, he said while speaking at an event promoted by the bank Bradesco, in the capital of São Paulo.

Neto said he has a “super positive” assessment of the new rules that should replace the spending cap and that he recognizes the “effort” of the federal government’s economic team.

The president of the monetary authority pondered, however, that it is still necessary to know if the text will undergo changes in the National Congress. “I think there is still a certain amount of anxiety on the part of revenues, and we need to see how it goes through Congress,” he added.

new rule

The new tax rule will limit expenditure growth to 70% of revenue change of the previous 12 months. The new framework will combine an expenditure limit that is more flexible than the expenditure ceiling with a primary result target (result of public accounts without public debt interest).

Within that 70% percentage, there will be an upper limit and a floor, a band, for the oscillation of expenditure, discounting the effect of inflation.

In times of greater economic growth, expenditure cannot grow by more than 2.5% per year above inflation. In times of economic contraction, spending cannot grow more than 0.6% per year above inflation.

Inflation

At another event, promoted by Esfera Brasil, Campos Neto said that inflation in Brazil, which has made it difficult to lower the basic interest rate, has part of its origin in an increase in demand for products. “We have the line of services coming back, the consumption of services has returned to the trend line. But the goods, no. It is way above the trend line. You had a shift in demand for goods that was structural,” he analyzed.

According to him, these inflationary pressures end up being reflected in other areas, such as the energy market. “If I have an increase in demand for goods that is structural, I also have an increase in demand for energy that is structural. Because for the same added value of goods, I consume almost five times more energy than services, ”he said.

The president of the Central Bank attributed, in part, this movement to the benefits granted to contain the effects of the covid-19 pandemic on the economy. “A lot of money was put into circulation through monetary and tax benefits. Taxes alone amounted to BRL 9 trillion in an economy of BRL 80 trillion, more than 10% ”, he pointed out.

Campos Neto defended the monetary policy, which has maintained the basic interest rate at a high level to contain inflation. “We try to smooth the cycle. We look forward. We understand that high interest rates cause these impacts on the productive part. We try to smooth this out, because our job is to do this in a way that causes the least possible damage to the economy”, he highlighted.

According to him, despite the difficulties caused in the economy at the moment, the monetary policy avoids bigger problems in the future. “The cost of fighting inflation is very high and is felt in the short term. The cost of not fighting is much higher and it is much more harmful and more enduring.”