New fiscal framework encourages “vicious circle” of rising inflation and government spending, says economist

Mariana explains that the increase in government spending contributes to higher inflation. As in the new fiscal design, expenditures are corrected by a range of 0.6% to 2.5% above inflation, the higher the inflation, the more the government can spend in relation to the previous year. It’s what economists call an inflation tax.

“What is the government saying? Instead of using this gain that I have due to inflation to solve some problem, this rule encourages the government to have more and more inflation so that it has more and more of this difference”, he says.

The economist points out that a vicious circle is established, in which more spending increases inflation which, in turn, allows for growth in spending. “You stimulate public spending, which will have this monetary impact that will generate inflation, in the end it will erode the purchasing power of the individual. Then you enter a vicious circle: you have a trigger that encourages the government to spend more, because that way he will collect more. This is bad in the long run”, he evaluates.

Exceptions

Approved by the Senate at the end of June, the new fiscal framework will be analyzed again by the Chamber of Deputies in the second semester because the text has undergone changes. The rapporteur, senator Omar Aziz (PSD-AM), included three new exceptions to the list of expenses that are outside the spending growth limit. They are: supplementing the Fund for the Maintenance and Development of Basic Education and the Valuation of Education Professionals (Fundeb), the Constitutional Fund of the Federal District (FCDF) and spending on science, technology and innovation.

For the economist, there should be no exceptions to the spending growth limit. “Every time you withdraw expenses from this rule, that you allow the government to expand its spending base, you are generating this indirect effect for society, which is the issue of inflation, which is you eroding purchasing power, mainly of the poorest people. These are the people who are unable to equip themselves with financial instruments to be able to perpetuate the purchasing power of their money”, he says.

Another change made by the senators and subject to analysis by the deputies will be the calculation of inflation. According to the new fiscal framework, government expenditures have to take into account the inflation of the 12 months prior to the preparation of the budget. Thus, to prepare the 2024 budget, the inflation that will serve as a base will be from July 2022 to June 2023.

But Senator Omar Aziz included an amendment to the text to allow the government to estimate inflation from January to December 2023 and, if it is greater than the inflation between July 2022 and June 2023, it can use the difference to increase expenses.

The government argues that the measure is necessary to avoid a loss of BRL 40 billion in next year’s budget, since, in 2022, the country had deflation for three consecutive months (between July and August), which impacts the calculation of inflation by the original rule of the fiscal framework.