Evolution of the Articles of Association – 04/08/2023 – Samuel Pessôa

The most important issue this semester is the new fiscal framework that Minister Fernando Haddad presented two weeks ago. I had the opportunity to share with the reader my first impressions in last week’s column.

I think it is opportune to go over the past. How has the Union’s primary spending evolved in recent decades?

Given that the bulk of public insurance associated with unemployment, poverty and loss of work capacity with aging or disability is the responsibility of the Union, I consider that central government primary spending expresses a very relevant portion of our social contract.

The graph shows the evolution of central government primary spending as a proportion of potential GDP. That is, the product of the economy if it had operated at full employment in the respective year. The public spending data is from the National Treasury and the full employment output data is from FGV IBRE. Three operations accounted for by the Treasury as a primary expense were disregarded: capitalization of the sovereign fund in 2008 and Petrobras in 2010, and agreement between the Union and the municipality of São Paulo on behalf of Campo de Marte in 2022. Conceptually, these are equity operations that do not sensitize the primary accounts. For 2023, we used the FGV IBRE forecast of 0.3% growth.

There are clearly three moments. From 1998 to 2015, primary spending grew by 5.1 percentage points (pp) of output, or 0.28 pp per year. From 2016 to 2019, primary spending remains constant at around 19%. And in the biennium 2021 and 2022, after the big leap due to the epidemic in 2020, spending remained constant at around 18% of GDP. Paulo Guedes promoted a strong fiscal adjustment, equivalent to that of Palocci in 2003.

Two facts are clear. First, the spending ceiling has achieved its objective and prevented further growth in spending. It freed us from the inflationary abyss. Second, apparently the Brazilian political economy and society do not tolerate primary government spending below 19% of GDP.

The generalized discourse of cursed inheritance applied to the legacy of Paulo Guedes in the fiscal area – after handing over the government with a primary surplus, public spending around 18% of GDP, lower indebtedness and with state-owned companies generating cash and little indebtedness –, as well as the strong support from the National Congress and civil society for the increase in public spending promoted by President Lula in 2023, fully illustrate the difficulty we have to live with spending below 19% of GDP.

These facts indicate that the National Congress and society, just as they supported the increase in public spending promoted by the Transition PEC, now need to support Minister Fernando Haddad in his initiatives to increase the tax burden. Attacking tax planning strategies of companies that operate on a real profit basis is a good start. But it will be necessary at some point to face the greatest source of tax avoidance that are given by the special, simple and presumed profit tax regimes.

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