Brazil seeks to establish new fiscal anchor

Since the end of last year, some ideas to replace the current Union spending ceiling have already been placed at the center of the debate. National Treasury technicians, for example, defend an expenditure rule linked to a fiscal anchor that has the debt as a reference. While the spending ceiling limits the increase in government expenditure to inflation variation, the Treasury proposal establishes a limit to the real growth (above inflation) of Union expenditure, conditioned to the level and trajectory of the Net General Government Debt (DLGG). In November, this index was at 57% in relation to GDP.

The central point of the proposal is: the higher the level of public debt, the lower the real growth rate (above inflation) of expenses. That is, if the debt is on an upward trajectory, the expenditure limit will be lower than if the debt is on a downward trajectory. Analyzes indicate that federal government spending could grow above inflation by up to 2.5% in the most favorable scenario.

There is also a design of the fiscal framework made by the group of economists that was part of the transitional government of the current administration of Luiz Inácio Lula da Silva. Among the pillars of the proposal is the implementation of an expenditure target, separating current short-term obligations (which support the funding of the public machine) from spending on long-term investments.

The group, which brought together André Lara Resende, Guilherme Mello, Nelson Barbosa and Persio Arida, understands that the concept of spending targets could transfer to fiscal policy principles that were successful with the use of the inflation targeting system in monetary policy , such as predictability and a sense of commitment.

According to Folhapress, the proposal was handed over to members of the government, but it was never disclosed. Within the PT, there is still a group that defends that Lula’s third term resume the logic of meeting only the primary result target, removing public investments from the account, for example.

According to guest professor at FGV Direito Rio Gabriel Quintanilha, regardless of the path taken, the adoption of a fiscal anchor is necessary for there to be market reliability in the Brazilian economy. “It demonstrates that the Brazilian state is not going to spend more than it can effectively support with its collection. That is, there will be a responsibility in public spending”, he says.

For the expert, the new fiscal anchor must take into account the need for mandatory spending, such as social security benefits and wages that grow above inflation, in addition to free public administration spending, such as the need for investments and financing of social programs. “With a very inflexible or very rigid spending ceiling, there is no possibility for public management to make expenditures that are essential for maintaining the well-being of society”, he points out.

Economist and Ipea researcher Sergio Gobetti believes that, as this is a controversial topic, the ideal would be to bring together specialists from the country, with different ideas, so that they could be debated until a common denominator was reached on which would be the best anchor formula tax for Brazil at this time.

Although he does not envision a ready-made fiscal anchor model, Gobetti ventures on some possibilities that could be taken into account. “I tend to think that an expenditure control rule could be maintained, but without a limit as rigid as inflation, but one that allows growth at a similar pace to GDP, similar to what happens in the European Union”, he suggests. The economist also considers that it is necessary to include the so-called tax expenditures in the ceiling, that is, tax incentives and financial incentives, something that does not currently occur.

“It would be a way of allowing the government to choose between expanding investment spending or tax spending. What is better for economic growth? It depends. But there is no reason for tax spending to have privileged treatment in relation to other expenses” , justifies Gobetti.

The current fiscal anchor model in Brazil bears little resemblance to what is adopted today around the world. Most countries that adopt spending caps do so through ordinary laws or multi-year plans, for a maximum of three or four years, for example. Furthermore, few countries have fixed the fiscal anchor in the Constitution as is the case here.

Also unlike other countries, the spending ceiling in Brazil includes investments (public works and equipment purchases) and does not have an escape valve in times of recession or economic crisis. In Peru, for example, which has adopted a spending ceiling since 1999, spending was not simply corrected for inflation, with real growth (above inflation) of 2% in the first years and 4% from 2004 onwards.

New Zealand, in turn, became a reference on the subject for being one of the first countries to build a fiscal framework, in the 1990s, the Fiscal Responsibility Act. The FRA differed by not setting specific numerical targets for public sector debt or surplus.

The purpose of the measure was to charge governments with short-term actions and long-term objectives with principles of fiscal responsibility. The country has advanced and renewed its fiscal policy, including social indicators such as quality of life.

The European Union is also a focus of attention when it comes to managing tax rules. The presence of economies with different conditions imposed the challenge of adopting homogeneous policies in order to guarantee the sustainability of the bloc’s public accounts. The Treaty of Maastricht, in 1992, defined the first fiscal rules with the responsibility of preventing and correcting the eventual excess of deficit of the member states.

The agreement set a nominal deficit ceiling of 3% and a debt ceiling of 60% of GDP. Over time, reforms of tax rules were implemented, seeking to meet the specific situation of each member of the bloc and long-term fiscal conditions. In general, the rules are adjusted according to the economic cycle of each country. Furthermore, the increase in member expenditures is limited to the same percentage expected for the medium-term GDP growth rate.