Chamber changes trick to allow more spending
To facilitate the approval of the project for the new fiscal framework in the Chamber, the rapporteur for the proposal, deputy Claudio Cajado (PP-BA), removed from the final version of the text a device that set the real growth of the public spending limit for 2024 at 2, 5%, regardless of the evolution in collection.
On the other hand, a new article included in the approved basic text authorizes the government of Luiz Inácio Lula da Silva (PT) to increase the space for new expenditures in May of next year, if the projected revenue for the year, at the end of the second two-month period, is higher than that provided for in the Annual Budget Law (LOA) of 2024.
The expansion of the spending limit, in this case, will occur in proportion to the difference between what was projected for 2024 in relation to what was carried out in 2023 and what was established in the LOA, up to a maximum of 2.5% of actual increase. If the estimate is not made at the end of the year, this increase in the ceiling will be “returned” in the 2025 financial year.
In practice, therefore, the Chamber exchanged one trick for another, in order to keep the government in a position to spend more next year. The text was approved by a large advantage: 372 votes in favor, 108 against and one abstention.
“In summary, the new text ends up going round and round to reach the same point: the expenditure limit must be corrected by 2.5% above inflation in 2024 and 2025, since additional revenues arising from measures that will come into force in the coming months will enable the government to reach this level”, analyzes Tiago Sbardelotto, from XP Investimentos.
For economists Felipe Salto, Josué Pellegrini and Fernanda Castro, from Warren Rena, the change could result in a real rate of change that will be between 1.1% and 2.5%. This would mean an increase of BRL 29.4 billion in the spending limit for 2024. On average from 2024 to 2032, this annual expansion in the spending ceiling could exceed BRL 36 billion.
“The implicit bet in this complex rule, it is worth saying, is that the revenue dynamics of 2024 should allow for a greater expansion of expenses, which would not be guaranteed in the presence of the general rule contained in the original text of PLP 93”, comment the analysts in report to customers.
“The problem is that, in practice, one may be creating a mechanism ad hoc which gives a very casuistic content for the first year of application of the fiscal framework, with the practical objective of producing a high real rate, which can approach 2.5%, even the 70% rule on the real variation of net revenue until June 2023, not giving rise to such behavior”, they write.
According to the newspaper “O Estado de S.Paulo”, the Minister of Finance, Fernando Haddad, acted directly behind the scenes to prevent the new version of the substitute for Cajado from limiting the expansion of government spending in 2024, the first year of validity of the new tax rule, if the text also has the endorsement of the Senate.
“The Chamber of Deputies demonstrated that it is seeking an understanding to help Brazil recover more expressive growth rates”, said Haddad in conversation with journalists shortly after the approval of the text in the Chamber.
Below are other changes made by Cajado in the final version of the complementary bill (PLP) 93/2023, which establishes the new tax rule.
Spending with Fundeb within the rule
The final version of Cajado’s report kept the Union’s expenses with supplementing the Basic Education Maintenance and Development Fund (Fundeb) within the scope of the new fiscal framework, unlike the government’s original text, which excluded the expenses from the rule. But it included a paragraph that made it more explicit that the increase in fund expenses will automatically raise the spending limit, allowing that increase to not crowd out other expenses.
Contingency of investments
Another device added to the supplementary bill allows for the contingency of investments, in the event of an imminent breach of the fiscal target, in the same proportion as the other discretionary measures. “In theory, this ensures greater space for the government to make the necessary adjustments to meet the primary result target during execution”, says Sbardelotto, from XP.
Minimum percentage of discretionary expenses
The previous version of the proposal allowed the government to define each year, in the Budgetary Guidelines Law (LDO), what would be the minimum percentage of discretionary expenses. “In theory, the government could define a minimum close to 100%, which would eliminate the possibility of contingencies and reduce the effectiveness of the rule”, explains the economist at XP.
In the approved text, however, this possibility was withdrawn, leaving only the minimum limit of 75% established by law.
The rapporteur also modified the rule regarding the minimum investment level. In the original proposal, the value would always be corrected for inflation and would start from the budget for 2023 (R$ 78.8 billion). Now, investments will have to correspond to 0.6% of GDP estimated in the Annual Budget Bill (LOA) for the respective year.
The 0.6% of projected GDP, according to Warren Rena’s estimate, would result in an amount of around R$ 63.9 billion. “The new rule, when compared to the previous one, opens up R$ 14.9 billion in discretionary expenses, increasing the space to make a primary result”, comment the brokerage analysts.
Prohibition of exclusion of primary expenses
Another modification was the addition of a paragraph that modifies the Fiscal Responsibility Law, prohibiting provisions that exclude expenses from the calculation of the primary result target.
“This device is very healthy”, evaluate Salto, Pellegrini and Fernanda, from Warren Rena. “The practice [de exclusão de despesas] has already been widely used in the recent past and has collaborated to distort the original mechanisms of the primary result targeting system adopted since 1999 in Brazil.”
Debt sustainability rule
The device that the initial substitute already had in terms of the debt/GDP sustainability rule was also complemented, with an explanation of the 10-year trajectory in the Annex of Fiscal Targets of the LDO and compatibility with the primary result targets. In the months of May, September and February, when the fiscal results are presented in commission, in the National Congress, the Minister of Finance will also be obliged to show the public debt figures and the fulfillment of the projected trajectory.