Tax framework: understand what changes in the lives of the population with the new rules
The so-called fiscal framework of the Ministry of Finance has three main points. The first is that government spending will be capped at 70% of revenue growth achieved in the previous 12 months. This means that if what the government collects from taxes, fees and other sources of revenue increases by R$ 10 billion, the following year it undertakes to increase expenses by a maximum of R$ 7 billion.
The second rule that the Executive proposes is that, regardless of what it collects, it can spend between 0.6% and 2.5% more than in the previous year. The spending ceiling limited the growth of expenses to zero, in practice. So it was more rigid.
According to Finance Minister Fernando Haddad, the idea of creating a minimum floor and a maximum ceiling for public spending is intended to prevent the Executive from having to cut spending when the economy is weaker or from spending too much in times of bonanza.
The third point of the fiscal framework is the creation of an interval or, as the government has called it, variation bands for the primary result target. The primary result is the difference between what the government collects and what it spends, excluding interest payments on the debt.
It’s like your bank balance, i.e. the difference between your salary and what’s left after paying all the household bills. In the case of the government, if the balance is negative at the end of the year, that is, if it is in the red, this is called the primary deficit. Now, if it stays in the blue, then we talk about a primary surplus.
When preparing the budget for the following year, the Executive has the duty to estimate what the primary result target will be. That is, the government draws an expectation of how much it will raise and predicts how much it will spend, does the math and says whether the following year there will be surplus or lack of money.
The Lula government’s proposal is to create variation bands for the primary result target. It would work like this: the government estimates what the primary result will be and an upward tolerance margin and a downward tolerance margin.
For this year, for example, the Executive estimates that public accounts will register a deficit (loss) of around R$ 50 billion. But with the proposed tolerance margins, if the fiscal framework is approved, it will be considered in compliance with this target of BRL 50 billion if the final result is between a deficit of BRL 75 billion (tolerance margin upwards) and BRL 25 bi (tolerance margin downwards), approx.
The government also proposes that, if it does not stay within this variation range, the following year it will only be able to increase expenses by 50% of revenue growth and no longer by 70%, as stated in the rule we saw at the beginning. On the other hand, if it exceeds expectations for the primary result, the remainder would be earmarked for investments.
I dont care?
As for the importance of the country having fiscal rules and following them, economist Benito Salomão, professor at the Institute of Economics and International Relations at the Federal University of Uberlândia, explains that balanced accounts bring countless benefits to the population. “It seems that these fiscal matters do not affect the population’s daily life, but indirectly they do. A credible fiscal rule is important, because a fiscal policy coordinated with monetary policy opens space for us to have an interest rate in the medium term lower, coexisting with lower inflation”, he says.
According to federal deputy Arnaldo Jardim (Cidadania-SP), president of the Parliamentary Front for Competitive Brazil, the commitment to public accounts has a direct impact on inflation. “The first very objective incidence of this is that if you have the balance, you have an effective instrument to combat inflation. We have no doubt that today in Brazil the cause that most pressures inflation is the high percentage of the public debt that we have Decreasing the debt is essential because it alleviates inflationary pressure. And the mechanism for that is exactly having fiscal balance”.
Alphatree’s chief economist, Raone Costa, points out that if a government is irresponsible with public accounts, there are only three paths to be taken: increase taxes to collect more, which penalizes the population and, mainly, the poorest; borrowing money, which increases public debt; or default on creditors, failing to pay the debt.
“When the government starts using inflationary taxes to meet the public budget, inflation increases and this impacts society as a whole, especially the poorest, who are less able to protect themselves. take his money and apply it to interest rates, which are usually going to be high at that point. So he manages to protect his equity more or less appropriately.”
A fourth alternative would be to cut expenses, reducing the public machine, being more efficient with the money that comes in and more rigid with the money that is spent. The economist says that, if the government starts to spend more than it earns, who lends money to it, whether financial institutions or even individuals who buy public debt securities, such as the Treasury Law, begin to suspect that the government will not have enough money to pay them or risk being defaulted.
The direct consequence of this mistrust is that creditors will ask for a greater reward, that is, higher interest rates to continue lending money to public administration. And then it becomes more expensive for people and companies to borrow money or finance with banks. “At the end of the day, this all becomes, in one way or another, difficulty in purchasing, either with inflation, price increases, or with difficulty in taking credit, because the one who is taking credit at that moment is the government to the detriment of society .”
High inflation leaves items on supermarket and store shelves more expensive. High interest rates make credit more expensive and, therefore, companies cannot find money to invest in increasing productivity or hiring more people, as well as citizens stop financing real estate or vehicles.
And, if people are consuming less and companies are not hiring, the economy grows less or ends up shrinking, which reduces the government’s tax collection. If public accounts remain out of balance, this could all lead to hyperinflation, a situation that Brazilians faced in the recent past and that Argentines face today.
Project will change “cat and mouse relationship” between tax payer and Revenue
By Brasil 61
