Congress should change Lula’s mobile spending cap 3 – 04/19/2023 – Vinicius Torres Freire

It took a day for them to digest the text of the law that creates Lula’s spending ceiling, the “fiscal framework”. Read and chewed, the project of the new rule of increase of expenses provoked a salseiro, made worse by the fact of the Central Bank to say that the interests will fall slowly.

However, large and relevant doubts and criticisms are not new, although the problem exists. New doubts are confusing or peripheral. No, the government did not refrain from presenting fiscal targets; expense exceptions are old and well known. Etc.

Economists and market people in general are revolted by the fact that, once the new fiscal law is approved, the federal government will practically not be obliged to meet a primary surplus target. That is, to spend less than it collects, in a certain specific amount. Without enough surplus, public debt will continue to grow. It does not give.

Indeed, the government will not be legally punished or constrained if it does not meet the targets. You will not be obliged to take corrective measures (contain expenses throughout the year, the so-called “contingency”), as provided for in the Fiscal Responsibility Law.

But this had been known for weeks, even though the letter of the law had not been read.

The new fiscal rule is not based on a primary balance target, but on a restriction on spending growth — the government had been emphatic about it. The primary balance will be whatever happens: the difference between a certain expenditure and the income that happens to occur.

“As it happens”: the government ultimately has no control over revenue, which depends on the pace of economic activity and additional tax collection (which mostly depends on Congress). It’s trouble.

Even if optimistic simulations are carried out, it is difficult to see how revenue will grow more than expenditure enough for the primary surpluses announced by the government to supervene. That is, there would not be a sufficient positive balance even with GDP growing at the rate estimated by the Treasury or with GDP inflation growing more than the IPCA. Furthermore, it would be necessary for revenue to grow faster than GDP, at the fastest pace of normal years in this century. Even so, some extra increase in the tax burden would be necessary (via reencumbrance or new tax).

Moreover, even if the surplus forecast by the government for 2026 were to come (1% of GDP) and this balance were maintained until 2033, the public debt would fall little. This with optimistic estimates for GDP and interest rates (which will fall slowly, by the way).

It is difficult to set the primary surplus target if expenditure is expected to grow, by law, at least 0.6% per year (in real terms) and there is no precise control over revenue growth.

Doesn’t mean it can’t work. To do so, I repeat, it is necessary to increase taxes (at least R$ 150 billion until 2026) and for the economy, the GDP, to grow well.

In order for it to grow well, microeconomic policy cannot be messed up (a necessary but not sufficient condition). Nonsense means manipulating prices, fooling around with state-owned companies, having bad rules for private investment, not implementing tax reform, etc. There is risk of bullshit.

In the bill, there is an objective consequence for non-compliance with the target. In this case, the government will not be able to increase expenditure by 70% of revenue growth, as is routinely envisaged in the new fiscal rule. The increase could only be 50%. In which year?

It would be a late restriction and, perhaps, insufficient to compensate for noncompliance with the target. Suppose that, in 2024, the government does not meet the target. You will only find out about this in early 2025, when the 2025 Budget will already be approved. The restriction would only apply to 2026, the last year of Lula 3. It is loose.

The essential question, however, is: how to incorporate into Lula’s movable ceiling rules for readjusting expenses and increasing revenue that will facilitate obtaining the necessary primary balance?

This is a question to be discussed in Congress.

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