center and right signal changes in the project

In the coming days, Congress will receive the government’s detailed and definitive project for a new fiscal framework for the country, replacing the current spending cap. The tendency is for the majority of parliamentarians – in center and right-wing parties – to work in a coordinated way to change the proposal in several points, due to the various inconsistencies left by the previous presentations made by the Minister of Finance, Fernando Haddad.

Members of Congress are already suggesting substantial changes to the text to avoid excessive dependence on a continuous increase in revenue and to defuse the imminent risk of raising the tax burden. Aware of these challenges, Planalto negotiators have launched a battle since last month to convince the market and society that their proposal actually focuses on limits and targets for public spending, going against the insistent discourse against austerity by President Luiz Inácio Lula da Silva (PT ).

Reactions so far have generally been far more positive than negative, but that hasn’t stopped criticism, especially in relation to excessive optimism with extra revenue, seen as essential to put the model on its feet.

The proposal predicts that spending growth in a given year will be up to 70% of the primary revenue expansion in the 12 months up to July of the previous year. For example: if revenues had a real increase of 2% in 12 months until July of this year, expenses for 2024 could grow up to 1.4%.

But there will be other benchmarks, such that federal spending will never grow by less than 0.6% – even in the event of a fall in revenue – or by more than 2.5%. Furthermore, the payment of the nursing floor and Fundeb, the basic education fund, will not be affected by these limits, and there will be a floor for public investment.

On the last 30th, the president of the Senate, Rodrigo Pacheco (PSD-MG), met with party leaders and ministers Haddad and Alexandre Padilha (Institutional Relations), who presented general lines of the proposal. After the meeting, he said he had a “deep commitment” to the agenda. “We expect the evolution of the legislative process, in which the Executive’s initial conception may undergo alteration, without losing sight of the fact that discipline and fiscal balance are fundamental to the country”, he added.

Earlier, the mayor, Arthur Lira (PP-AL), said he had listened to the proposal with satisfaction, but warned that the plenary of the House will debate it rigorously and will make “necessary adjustments” to it.

The bill awaiting Congress is already the target of lobbying by business sectors opposed to the measures considered by the government as necessary to make the fiscal framework credible, including taxation of sectors such as online importers and electronic betting and the end of tax benefits to other sectors.

In recent interviews, Senator Ciro Nogueira (PP-PI), former Chief of Staff of the Jair Bolsonaro (PL) government, has not spared criticism of the fiscal framework presented by Haddad. For him, the proposal has an inflationary bias as it is based on increased revenue and does not provide for cutting expenses.

“Fiscal anchor serves to prevent the imbalance between revenues and expenditures, without the government spending much more than it collects and, with this, raising the public debt to a level that leads to distrust among investors about the country’s ability to honor the payment of its debt. debt,” he said.

At first, the opposition leader in the Senate, senator Rogério Marinho (PL-RN), said he was ready to collaborate with “consistent fiscal policy”. “If the presented framework gives solidity, shows that the debt trajectory will decline or at least stabilize, it will have our support”, he said.

Days later, however, Marinho was more critical. A report presented on Wednesday (5) by minority and opposition leaders in the Senate states that the government’s proposal is limited and “disconnected from the constitutional command to institute a regime that guarantees the country’s macroeconomic sustainability.”

“With the little that has been disclosed, we know that the plan is unfeasible”, said the senator. According to the report, the proposal runs the risk of imposing measures on the government to increase revenues “without considering political legal limits and economic activity itself”, in addition to not addressing the quality of public spending.

The president of the Novo party, Eduardo Ribeiro, also criticized the framework, which he classified as “fragile” and based on “projections that will only materialize with an increase in taxes”.

Ibmec-DF public policy professor Arthur Wittenberg explains that the fact that congressional leaders have welcomed the proposed fiscal milestone with instant declarations of support from the presidents of the Chamber and the Senate may even indicate that they have control over the benches and the vote. “But the consolidation of the fiscal framework will depend on votes on other matters, such as tax reform, which could make it drag on”, he assesses.

In favor of this thesis, Wittenberg believes that the opposition should submit requests for public hearings, causing inconvenience, especially in the Chamber. “With all this, there is no clear estimate for its completion,” he says. Haddad has already warned that the government does not think of a plan B, in case the project he is going to send does not advance in the desired way.

In this uncertain scenario, parliamentarians from the center anticipated and have already opened the debate on the fiscal framework while waiting for the government’s proposal. Deputy Pedro Paulo (PSD-RJ) filed an alternative project (PLP 62/2023), with the support of the party’s bench, proposing to make the public debt a benchmark for controlling expenses, in contrast to the government’s proposal, which makes the collection a type of fiscal anchor.

For political consultant Ismael Almeida, from Podemos, Pedro Paulo’s project advances in relation to Haddad’s proposal. While the government foresees a spending limit with a real growth band of primary expenditure of 0.6% to 2.5% per year, the deputy proposes a more restrictive limit, of 1% or 0.5%, depending on whether there is a surplus or not. in the previous year.

In addition, the PLP includes measures to maintain the debt at a sustainable level. One of them, for example, provides for a gradual reduction, over the next two financial years, of at least 20% of expenses with commissioned positions and positions of trust. “The fundamental difference between the projects is that Pedro Paulo’s is not based on a hypothetical increase in revenues to justify more expenses now. Instead, it foresees a smaller increase in expenses, driven by the public debt”, says Almeida.

Ambitious target of the fiscal framework raises questions from analysts

Under the proposal, the government undertakes to improve, year after year, its accounts, until reaching in 2026 a positive balance of public accounts equivalent to 1% of the Gross Domestic Product (GDP). The first doubts arose from the 0.6% floor for spending growth, which Haddad wants to cover with economic growth and tax reform. At this rate, the ten-year debt curve would rise from the current level of 73% to 95% of GDP.

The biggest fear of deputies and senators critical of the government’s proposal is that its success is even being conditioned to the reduction of the basic interest rate and the tax reform, classified by the Minister of Planning, Simone Tebet, as the “silver bullet” of the government, therefore more valuable than the “bronze bullet” represented by the fiscal framework.

The projection of more fiscal rigidity only after developments in the tax area makes the government’s proposal less exciting for the plenary. Just remember that the Treasury announced a primary deficit of R$41 billion for February, the highest in the last 26 years for the month. Not by chance, the economic team works with equal diligence to bring taxpayers who are outside of it into the tax system and correct distortions in the unregulated sectors, which impact on a significant loss of revenue.

It is for this reason that the Ministry of Finance also intends to announce in the next few days the adoption of remedial measures to collect from R$ 100 billion to R$ 150 billion in new resources.

Approval of the new fiscal framework requires a simple majority of votes

Lula’s fiscal framework will begin to be processed as a complementary bill, whose approval depends only on the favorable votes of a simple majority: 257 deputies and 41 senators. The current spending ceiling, instituted during the government of President Michel Temer (MDB), was born from a constitutional amendment approved in December 2016. From 2019 to 2022, the regime was breached five times, with the approval of Congress, mainly due to the hundreds of billions of reais from the Treasury to react to the pandemic.

The last easing came with the proposed amendment to Constitution 32/2022 (PEC da Transição, or PEC fura-teto), which allowed the Lula government to leave R$ 145 billion of the 2023 Budget outside the ceiling, to pay for social programs and other ongoing expenses. With the PEC also came the determination for the government to present the new framework.

Felipe Salto, chief economist at the Warren Rena brokerage and one of the country’s leading specialists in public accounts, said in an interview with the InfoMoney website that he is confident in the ability of the new fiscal rule to contain the trajectory of the public debt, even without the Lula government reaching the goals of returning to blue in cash by the last year of the president’s term. While the framework’s success hinges on enforcement and the government’s ability to enforce the rule, he sees it as a good first step.