Fiscal framework: spending floor brings risk to the economy, experts point out

In the report, the specialists evaluated that it is important to present a set of rules that will guide the public accounts. But there is a fear that in order to meet the planned expenditures and primary result targets, the government will have to increase the tax burden – even if Minister Haddad had discarded the idea at first.

Specialist in tax and corporate law, Leonardo Roesler, founding partner of RMS Advogados, assesses the government’s proposal as positive. “Now a clearer regulation is being put in place. I think it is super positive, mainly to calm down foreign investors a little, to say that, in fact, this government is looking at fiscal responsibility”. He believes that if the fiscal framework is well structured and can be accompanied by the approval of structural reforms, such as tax and administrative reforms, the country can achieve stability in public accounts and economic growth.

Economist Lucas Jardim Matos assesses that, in the end, the economic team was able to wave both to the most ideological wing of the government and to the financial market. “The expectation was that the government would not be able to please either its base or the market. But the reaction was the opposite. You didn’t see the PT criticizing the proposal, nor a negative reaction from the market. the stock market has grown. We have to take into account that Haddad managed to reach a middle ground”.

Raone Costa, chief economist at Alphatree, warns that the government has not given any indication that it intends to reduce spending in the coming years, not even if the economy retreats. “We didn’t have any kind of spending cut measures announced. On the contrary, a series of spending increase measures were announced. Another thing that is not clear is, if things start to tighten, where does the government cut from? This could have been placed in the framework and it wasn’t”, he evaluates.

Federal deputy Arnaldo Jardim (Cidadania-SP), president of the Parliamentary Front for Competitive Brazil, classified the proposal as “capenga”.

“The projection that the framework makes that expenditures will grow less than revenue growth from a future year is insufficient given the need we have to contain expenditure immediately. The government now has expenditures much higher than revenues . If we are not able to have an immediate reduction in expenses, there is only one logic left that can allow this balance. It is if there is an increase in collection”, he criticizes.

Professor of economics at the Federal University of Uberlândia (UFU), Benito Salomão expressed concern about the government’s compliance with fiscal rules, since, according to him, the country does not have a good record of respecting the rules in times of crisis.

“You create all sorts of excuses to say that the adjustment cannot be made that year because of a specific context and then you don’t comply with the rule. Brazil has fiscal rules. What Brazil needs is a culture of compliance with tax rules. We’ve been breaking tax rules for a decade,” he says.

Main points of the fiscal framework proposed by the government

Understand below each of the rules suggested by the Ministry of Finance and what experts think about the measures.

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  Government spending will be capped at 70% of primary revenue growth achieved in the previous 12 months

This means that if government revenue from taxes, fees, concessions, royaltiesamong others, grow by 1%, for example, public spending can only rise by 0.7%, as 70% of 1% is equal to 0.7%.

In another illustrative scenario, if revenue rises by 2%, the increase in expenses will be limited to 1.4%. If revenue grows by 3%, expenses will only be able to rise by 2.1% and so on. To calculate how much it will be able to spend, the government will consider the revenue obtained between July of one year and June of the following year.

Think of it like this: if the government collects R$ 10 billion more between July 2022 and June 2023, under the new fiscal rule it will only be able to increase spending by 70% of that amount in 2024, that is, R$ 7 billion.

The government also suggests a second rule for public spending.

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  The government’s primary expenditure could grow between 0.6% and 2.5% per year

This point of the new fiscal framework is called the “countercyclical mechanism” by the economic team. The idea is that at times when the economy slows down and government revenue declines, expenditure has a guaranteed real growth of 0.6% – not counting inflation – compared to the previous year.

Raone Costa says that the rule makes the tax framework proposed by the Treasury less rigid than the spending ceiling. In effect, the spending ceiling says that government spending cannot have real growth, which means that government spending cannot rise by anything other than inflation.

The Lula government’s proposal is that, even if revenue falls from one year to the next, expenditure has a minimum growth floor, which is 0.6% plus inflation. In good years for federal revenues, the government proposes a 2.5% real spending growth limit. This tries to prevent the Executive, faced with an extraordinary volume of revenues, from spending up to the limit of the first rule.

“The government is trying to make a fiscal plan that is countercyclical. The idea is interesting. But, honestly, I don’t think it’s interesting, at any time, for spending to rise 2.5% above inflation. real was zero. The country already spends a lot. I would like to see measures that promote both a reduction in taxes and public spending over time, and what this package does is the opposite”, says Raone.

According to Rodrigo Leite, professor of public finance at Coppead at the Federal University of Rio de Janeiro (UFRJ), establishing a ceiling for the growth of expenses at a time when collections are rising is positive. But he warns that the creation of a minimum floor for real spending could throw the country into an inflationary spiral at times of economic downturn.

“Imagine a scenario of a 2% drop in GDP and 10% inflation and revenue fell by 3%. It means that the government would have to increase spending for the following year by 10.6%, with a 0.6% real increase in addition to inflation. We have a scenario of falling revenues, rising inflation and falling GDP and the government is forced to spend more. This has the potential to cause an inflationary spiral in the country. Inflation has risen, the government is spending more and because the government is spending more inflation is rising”.

Economist Lucas Matos states that the measure proposed by the government is not countercyclical, because even when revenue falls there will be a real increase in expenses, when, in fact, one should seek to contain expenses.

“Anti-cyclical is: the government is collecting more, it reduces spending to create savings. When the government grows little, it uses this savings to encourage. Now, what the government has presented is that it will always be encouraging spending. This is a pro-cyclical and not anti-cyclical measure”.

According to the proposal, expenses with the Fund for the Maintenance and Development of Basic Education and the Valorization of Education Professionals (Fundeb) and the nursing floor would be excluded from this limit for expenses.

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  The primary result target now has a range (or bands) of variation

The primary result is the difference between what the government collects and what it spends, not counting interest payments on the debt. Each year the Executive has to establish a target (value) for the primary result of the following year.

The new fiscal framework presented by the Minister of Finance creates a variation range (or bands) for the primary result target. That is, in addition to the target, there will be tolerance margins for more and less, something similar to what happens with the inflation targeting regime.

In 2023, for example, the inflation target to be pursued by the Central Bank is 3.25%. But due to the tolerance interval of 1.5 percentage points more or less, it will be considered fulfilled if it is between 1.75% and 4.75%.

To understand the proposed change, let’s use the target for the 2023 primary result as a basis. According to the economic team, the difference between what the government will collect and what it will spend this year corresponds to – 0.5% of the Domestic Product Gross (GDP), equivalent to about R$ 50 billion. That is, the government estimates that it will be in the red by R$ 50 billion.

With the idea of ​​introducing a variation interval, the 2023 primary result could vary by up to 0.25 percentage points up or down, which, even so, will be considered fulfilled.

Under the current rule, the government will have met the primary result target if it closes the year with a loss of BRL 50 billion. But with the creation of the variation bands, the Executive will have met the target as long as the accounts are in the red between R$ 75 billion and R$ 25 billion.

Benito Salomão points out that the establishment of margins for the primary result target can harm the Executive’s search for the best possible result. “There is always an incentive for the government to take the primary result and bring it down to the target floor: it spends more and delivers that primary result that is as low as possible within the bands it announced”, he points out.

But what happens if the primary result falls outside the range? According to the Ministry of Finance, if public accounts outperform the target limit, which in 2023, for example, would mean closing the cash register with even less than R$25 billion, the excess will be directed towards investments.

Now, if the primary result is even worse than expected, there will be a cap on expenditure growth to 50% of the previous year’s revenue growth and no more than 70%, as the first rule of the framework says.

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