Economists criticize fiscal framework and say debt will rise

In a public hearing held by the Senate Economic Affairs Committee (CAE) this Tuesday morning (20), economists José Márcio Camargo, from the Pontifical Catholic University of Rio de Janeiro (PUC-RJ), and Marcos Mendes, from Insper , pointed out a series of inconsistencies in the government’s proposal for a new fiscal framework. For them, the project is insufficient to stabilize the Brazilian public debt.

The new framework for controlling public accounts designed by the economic team was approved by the Chamber of Deputies at the end of May. Forwarded to the Senate, the text should be voted on this Tuesday at the CAE and may go to plenary as early as Wednesday (21), as provided for in the agenda of the deliberative sessions of the House. In the CAE alone, the text, reported by Senator Omar Aziz (PSD-AM), had already received 71 amendment proposals until this morning.

“The primary result targets show a certain exaggerated optimism on the part of the government regarding the ability to generate primary surpluses throughout this process”, said the PUC-RJ economist at the hearing. “Both our data and those of the financial market, the [boletim] Focus, show a behavior of the primary deficit much worse than the government projections suggest.”

According to the median expectations of the latest edition of Focus, released by the Central Bank on Monday (19), the market forecasts a primary deficit equivalent to 0.7% of GDP in 2024, 0.4% in 2025 and 0. 2% in 2026. The government set the goal of zeroing the deficit in 2024 and obtaining primary surpluses equivalent to 0.5% of GDP in 2025 and 1% in 2026.

Camargo mainly criticized the dependence on a significant increase in revenues. “Even in a scenario of an increase in the tax burden sufficient to stabilize the Brazilian public debt, political demands will be an important risk factor over the next few years,” he said, citing government promises such as the policy of real appreciation of the minimum wage and the correction of the income tax table.

In the economist’s calculations, the debt path presented by the government would only be consistent under the assumption of inflation levels close to 7.5% between 2024 and 2026 or an increase in the tax burden of around 3%. “In our simulations, debt stabilizes at approximately 92% of GDP in 2033, on the edge of the cliff,” he said.

Also critical of the government’s proposal, Marcos Mendes, from Insper, nevertheless defended the approval of the text. Mendes worked at the Ministry of Finance during the Temer government and is one of the authors of the spending cap, a rule that will be replaced by the new fiscal framework.

“Despite these problems, it seems to me that it is opportune to approve the bill, preferably with improvements that increase fiscal control, because we really don’t see a better alternative, given the political-institutional framework that we have”, he said.

“It is a pleasure to see that the government has started to have some concern with the control of public expenses, because the discourse until a few months ago was exactly the opposite, that there would be no problem”, he temporized. “The fact that the government is presenting some fiscal framework already gives some encouragement, in the sense that we will not go to the worst scenario in fiscal policy.”

He presented the CAE senators with some suggestions that he believed would make the new tax regime more effective. Among them, triggering all expenditure control triggers in the first year after non-compliance with the primary result target and the inclusion of the real increase in the minimum wage in the prohibitions imposed by the triggers.

Mendes also proposed reducing the minimum level of investment and decoupling it from GDP, in addition to recalibrating the limit for real increase in expenditure from the range between 0.6% to 2.5% to the range between 0% and 2%. Another suggestion would be to end the use of excess surplus for investments.

“Above all, I think the most important thing is to turn the page on this discussion of the fiscal framework, and for Congress to focus on the main agenda for this and next year, which is tax reform, which, indeed, is capable of changing the game in terms of economic growth”, he concluded.