Advances and setbacks in the tax rule – 04/22/2023 – Samuel Pessôa

Last week, the government released the text of the complementary law that will establish the new fiscal rule.

The biggest advance of the rule was the establishment of a band for the real growth of the Union’s primary expenditure. A left-wing government recognizes the existence of a limitation on public spending.

As I stated in this space two weeks ago, the rule is pro-cyclical, as it links public spending growth to revenue growth. However, the floor and ceiling for public spending growth reduce the pro-cyclicality of the fiscal rule.

It is necessary to improve the wording of the fourth paragraph of the fourth article. The paragraph refers to the calculation of the real revenue growth rate that will guide the spending growth in the Budgetary Guidelines Law for the subsequent year. Ideally, real monthly revenue should be calculated, month by month, and then the total revenue growth rate calculated in 12 months compared to the immediately preceding 12 months.

As already known, the primary surplus targets for the coming years will only be feasible if there is a sharp increase in the tax burden. If there is no growth in the tax burden and if the economy grows at around 1.5% per year, public spending will be around 19% of GDP by 2026. There will be a primary deficit by 2025, and if we are lucky, the primary surplus will be zero in 2026. The gross debt will grow by around 15 percentage points of GDP in Lula’s quadrennium.

Thus, until further notice, the primary surplus targets of -0.5%, 0%, 0.5% and 1% of GDP, respectively in 2023, 2024, 2025 and 2026, are unrealizable.

Minister Haddad’s strategy to cope with the risk of non-compliance with the targets —which he himself had established— was to change the ninth article of the LRF (Fiscal Responsibility Law). The new LRF article reads: “In the event that it is verified, within the scope of the Union, that, at the end of the months of March, June and September, the estimate of income or expenses may not support the fulfillment of the primary result target established in the annex of fiscal targets of the Budgetary Guidelines Law, the Executive, Legislative and Judiciary branches of the Union, the Public Ministry of the Union and the Public Defender’s Office of the Union: 1 – may to promote, by its own act and in the necessary amounts, in the subsequent 30 days, limitation of commitment and financial movement, according to the criteria established by the Budgetary Guidelines Law”.

All expenditure control throughout the annual tax execution is no longer mandatory. And, consequently, a paragraph in the new article of the LRF establishes that “non-compliance with the goal referred to in the article does not constitute an infringement of this complementary law”.

The decriminalization of fiscal policy, as Minister Haddad referred to the alteration of the text of the LRF, opens the door for the action of pressure groups throughout the execution of the Budget. This decriminalization removes power from public agents, who, at this moment, are the defenders of the collective interest, to say no when the agents of pressure groups and private powers knock on the door of the ministries.

When the year ends and the Executive sends a letter to Congress explaining the reasons for not reaching the goal, the particular interests will already be contemplated. In Brazil, everything becomes an acquired right in the blink of an eye.

It is much better to work with realistic fiscal execution targets and keep track of targets in annual execution.

It is necessary for the National Congress to return to the model of controlling public spending in the execution of the Budget throughout the calendar year.

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