Deputy presents alternative proposal for tax rule with flexible increase in expenses – 03/16/2023 – Market

While the Minister of Finance, Fernando Haddad (PT), maintains secrecy around the details of his proposal for a fiscal rule, members of the National Congress are starting to move to propose alternatives to the government’s initiative.

Deputy Pedro Paulo (PSD-RJ), former Secretary of Finance and Planning of the city of Rio de Janeiro, filed this Thursday (16) a complementary bill that suggests a new fiscal framework to replace the spending ceiling, as foreseen in the PEC (proposed amendment to the Constitution) of the Transition.

The text proposes a flexible limit for expenditure growth, with the possibility of growth above inflation if the country’s debt is on a sustainable path.

“With the help of many people who understand theory and practice and share with me a more responsible and rigorous vision of the need for fiscal balance and debt sustainability, and who live in confrontation with our leniency in coexisting without guilt with a wasteful State and spender, today I will present a framework proposal”, said Pedro Paulo.

The formulation of the proposal had the support of technicians from the Chamber’s Budget Consultancy, among them Ricardo Volpe, Eugênio Greggianin, Márcia Moura, Leonardo Rolim and Hélio Tolini.

According to the deputy, he also received important contributions and revisions from Marcos Mendes, former head of the Special Advisory Office of the Ministry of Finance and columnist for Folha, and Fábio Giambiagi, specialist in public accounts.

Paulo also lists as collaborators servants of the Executive who have held positions of command, such as Ariosto Culau (former Federal Budget Secretary in the Jair Bolsonaro government) and Esteves Colnago (former Minister of Planning in the Michel Temer government and former special secretary of Treasury and Budget of the Bolsonaro administration).

The proposal is presented at a time when Haddad is preparing to discuss the details of his project with President Luiz Inácio Lula da Silva (PT). The two should have a meeting this Friday (17) to discuss the proposal, along with other ministers of the economic area and with the Civil House.

In Pedro Paulo’s project, the main reference parameters are expenditure, indebtedness and the primary result (which can be positive or negative and is calculated by the difference between expenditures and revenue).

In summary, the mechanism consists of a limit to the growth of expenses, which will always at least reset inflation, but may be higher if the debt is controlled and there is a primary surplus —that is, more revenue than expenditure. Its validity would be from 2024.

The inflation index would be the IPCA (National Consumer Price Index) observed in 12 months up to June of the year prior to the expiration of the expenditure limit. Thus, the Budget would be prepared based on an already known parameter, instead of an estimate.

The debt reference would be the DLGG (general government net debt), which includes the federal government, states and municipalities. The choice is made because, unlike other better-known indicators (such as gross debt), the DLGG excludes state-owned debt and public securities used by the Central Bank to make its interest rate policy.

The text considers “sustainable” a level of DLGG that does not exceed 50% of GDP (Gross Domestic Product).

If the general government’s net debt is below this threshold, the spending cap could be increased by inflation plus 1.5%, or by inflation plus the economy’s average growth over the previous three years—whichever is greater.

If the indebtedness indicator is between 50% and 60% of GDP, the limit could grow 1% above inflation, if there is a primary surplus, or 0.5%, if there is a deficit.

With a net debt above 60%, expenses could only rise due to inflation, without a real increase.

In January 2023, the DLGG was at 56.79% of GDP (Gross Domestic Product), according to data from the Central Bank. This means that, if Pedro Paulo’s proposal were approved, the government would fit into the intermediate situation and could expand its expenditures by up to 1% above inflation.

The other Powers, such as the Judiciary and the Legislature, would benefit only in part from the more sustainable trajectory of public accounts. With their budgets concentrated on personnel expenses, they would have endorsement for real expansion of expenses only up to 0.5%, when the DLGG is below 60% of GDP.

There are also exceptions for expenses outside the limit, which include constitutional transfers to states and municipalities, expenses with elections and Demographic Census, expenses funded with donations or judicial agreements signed due to environmental disasters and expenses of federal educational institutions funded with their own revenues.

Extraordinary credits also follow as an exhaust valve for urgent and unforeseen expenses – as occurred in 2020, with the Covid-19 pandemic. As of 2027, the government could still settle the judicial debts of previous years and which were postponed by the PEC of Precatorios.

The project also foresees countercyclical mechanisms, that is, to mitigate the effects of oscillations in economic activity. In times of crisis, with a drop in GDP for three consecutive quarters, the government could trigger a clause that authorizes growth in expenses by the average GDP of the two previous years.

There are also predictions of adjustment triggers if the general government’s net debt is above the sustainable level of 50% of GDP. The central objective is to correct deviations and ensure the convergence of the debt path.

They include measures to preserve or recompose revenues (such as prohibiting new tax incentives and reducing existing ones) and containment of the expansion of mandatory expenses, such as payroll and expenses linked to the minimum wage. In more extreme situations, the law provides for a linear cut of 20% in expenses with commissioned positions and positions of trust.

Some triggers would also be triggered if mandatory expenses exceed the rate of 93% of all expenses. Today, this percentage is 89.11%.

The project also stipulates punishment for anyone who orders or authorizes measures in violation of these prohibitions. The acts will be considered a crime of responsibility and administrative impropriety, punishable by loss of office, loss of political rights and a fine of up to 48 minimum wages.

“Thus, it is not enough for a fiscal rule to establish a reference limit — whether aimed at controlling debt, fiscal results, primary expenditure, or the golden rule. It is necessary to guarantee, in a preventive and also corrective way, that, once the fixed limit is reached, the necessary adjustments are made to correct the verified fiscal economic imbalance”, says the justification for the project.