Fiscal framework: analysts receive with caution and doubts – 04/18/2023 – Market

The presentation of the new fiscal framework by the government of President Luiz Inácio Lula da Silva (PT) this Tuesday (18) was viewed positively as it signals an alternative commitment to the spending cap, according to analysts interviewed by the Sheet.

They criticize, however, the complex nature of the fiscal rule and show concern about the government’s ability to fulfill its campaign promises that require greater investments, but run into the search for more revenue.

“The most important exception should be investment, and the government should be strict with other expenses. Investment continues with a ceiling, when it is within the rule, we will have nothing to foster growth”, says the FGV economist ( Getulio Vargas Foundation) Nelson Marconi.

“They created exceptionalities, under pressure from certain groups, such as health and education and sustainability programs. They saw that the 70% limit rule on revenue is very restrictive and that they would not be able to comply with a series of policies that the government is proposing. In the end, the balance is quite reasonable.”

“Of course, it won’t be a clear sky for the government, but it is counting on revenue growth last year. For 2025, they are now chasing revenue. look for alternatives.”

For the chief economist of MB Associados, Sergio Vale, the framework brings some positive points, such as restrictions on non-recurring revenues in the calculation of expenses.

“But the numerous exceptions to the spending rule cast doubt on whether the government will in fact avoid the temptation to use escapes from the rule. There is a great risk that spending will grow much more than the government stipulates in the rule.”

Vale adds that, to close the bill, the government will need a significant increase in revenue, and it is not clear how it will manage to do this.

“The government will live in contingency and will probably not be able to deliver the result.” He also says he believes that the government understood in January that they would need to rush to deliver the rule as soon as possible.

“It was confirmed that it is a more complex rule than desired and that it left many questions open and that leave room for many to be left out. The main point is the confirmation of not having a definition of the goals. In fact, having the target would mean that the arrangement is not consistent”, says economist Zeina Latif.

For Professor Pedro Paulo Zahluth Bastos, from Unicamp (State University of Campinas), the new fiscal framework determines a reduction in the size of the State over time, unless the tax burden grows consistently.

“The fact that neither Caixa, Banco do Brasil nor BNDES were included in the possible exceptions limits the ability to implement a subsidized credit policy. It will also have an impact on public credit in the medium and long term.”

He is also worried about the short margin for the government to act next year. In practice, any increase in revenue that occurs after July 2023 will only count towards the 2025 Budget, says Bastos.

The exclusion of some items from the law will not fail to provoke a conflict between different types of expenditure, as it is known that health and education expenditures are indexed in relation to revenue, he adds.

“The INSS is indexed to the minimum wage, increasing the salary, there will be an increase in the payroll and social security spending, causing other public expenses to be crushed.”

In a note, the chief economist at Warren Rena, Felipe Salto, says that the new fiscal framework is in line with expectations and will allow for a real advance of 2.3% in 2024 spending.

According to him, the nominal correction of expenses should be 6.6% next year. “Under the hypothesis of an inflation of around 4.2% next year, spending will have grown, at the end of the year, around 2.3% in real terms.”

Also in a note, Abrainc (Brazilian Association of Real Estate Developers) says it understands the implementation of the new fiscal framework as a necessary and urgent measure.

“The new rule can bring balance to public accounts in the long term and this is an essential condition for us to have low interest rates in a sustainable way and new investments, guaranteeing the generation of jobs”, writes the entity.