Fiscal framework: end of punishment for managers who fail to meet targets and preventive blocking weakens spending control, say analysts

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Proposed fiscal framework was sent by the government to Congress in April, and still needs to be approved by the Legislature to be valid. The end of crimes of responsibility for authorities for not reaching fiscal targets and the end of the mandatory blocking of public spending to achieve predetermined objectives weaken the rules of expenditure control. This is the opinion of analysts and politicians heard by g1 and TV Globo. The changes are contained in the proposal for the new fiscal framework, sent by the government to the National Congress for analysis in April, and would alter the Fiscal Responsibility Law (LRF). To be valid, the rules still need to be approved by the Legislature. According to the text, in place of the crimes of responsibility for non-compliance with the targets, which are contained in the Fiscal Responsibility Law (LRF), it will be enough for the President of the Republic to send a message to the National Congress and explain the reasons for the non-compliance with the targets for the results of the accounts public. The proposed new fiscal framework also made it optional for the government to limit (block) expenditures to meet fiscal targets. In recent years, to meet the spending cap and fiscal targets, different governments have had to authorize budget blocks to balance the budget. In the event of non-compliance with fiscal targets, the proposed framework determines that the increase in expenses is limited to 50% of the increase in revenue. Under the normal rule, this growth could be greater: up to 70% of the increase in revenue. For the president of the Novo party, Eduardo Ribeiro, the proposed new fiscal rule is dangerous and could become a disaster for the Brazilian economic scenario. “The proposed new framework, in addition to being fragile from a fiscal point of view, is almost null from a punitive point of view. What is the incentive to comply with a rule that has no punishment?”, asked Ribeiro. This Tuesday (25th), the president of the Central Bank, Roberto Campos Neto, stated that there is no “silver bullet”, and that it is necessary to have accounts up to date for the economy to improve. And he highlighted that the adjustment on the expense control side is more effective to contain inflation. “When, in any country of the world, [o ajuste nas contas] is more cost-cutting, have more beneficial effects on inflation. When is more [alta] of revenue, does not have as beneficial an effect on inflation as cutting expenses”, declared Campos Neto, at that moment. Position of Haddad This week, the Minister of Finance, Fernando Haddad, downplayed the fact that the proposal for a new fiscal rule the punishment of authorities in the event of non-compliance with fiscal targets. “I have heard this type of comment, but nobody punishes the Central Bank for not meeting the inflation target. What I believe in is having rules that make management more rigid. This I believe. It makes the goal more rigid. But the fiscal result depends on Congress, it depends on the Supreme Court, it doesn’t depend only on the Executive”, declared the minister, at the time. continuous and that you monitor the expenses than you have a garrotte, which is another make-believe”, he opined. Haddad had previously said that it will be necessary to raise the collection by up to R$ 150 billion in the coming years to meet the fiscal targets of the framework. At the same time, a survey by economists from the Warren Rena brokerage indicates the need for at least R$ 254 billion in revenue growth, by 2026, to reach the baseline of the framework’s primary result targets. Analysts had already told g1 that the fiscal framework focuses mainly on raising revenue and that there is a lack of clearer indications on controlling public spending.. What analysts say According to economist Marcos Lisboa, president of Insper and former secretary of Economic Policy at the Ministry of Finance, the rules of the Fiscal Responsibility Law, which can be changed, protect the common interest. He assessed that there are “localized groups with specific interests, subsidies, amendments, funds, subsidized interest” working in Brasília. “The contingency [bloqueio de gastos preventivo] and the LRF rules help to protect the economic team and State agents against these pressures (…) I think it is a big setback. Brazil has a very long history of serious fiscal problems. The LRF was a great advance, but it has been increasingly weakened over the years”, he declared. For Gabriel Leal de Barros, from Ryo Asset, the absence of punishments for non-compliance associated with the great dependence on increased tax burden weakens the proposed fiscal framework . “In addition to the fact that they also changed the LRF in the part that requires the contingency [bloqueio] of expenses, which will be optional (…) It is a letter of intent, basically”, declared the analyst. According to him, the punishment proposed in the framework, which is to reduce the growth of expenses from 70% to 50% of the high of revenue, in the case of non-compliance with the targets, is practically nil. “You can’t even consider this as a punishment. Spending continues to grow indefinitely. It is very weak, in addition to making the LRF punishments more flexible. The absence of punishments makes the market’s confidence in meeting the target low”, said Barros. Bráulio Borges, associate researcher at FGV Ibre and senior economist at LCA, assessed that the changes proposed by the government represent a “relief” in terms of punishment. “In fact, there is punishment, but more reputational punishment, of having to explain to Congress in the following period why the target was not met, similar to the Central Bank model, today the punishment is a criminal punishment, it is stronger “, he declared. According to the economist, if there was already skepticism regarding the fulfillment of the fiscal targets proposed in the framework, the proposed change of rules “increases even more skepticism regarding the delivery of this primary result target commitment by 2026”. Opposition and Government begin to discuss the proposed fiscal framework in the Chamber Solange Srour, chief economist at Credit Suisse Brasil, assessed that the proposals contained in the fiscal framework represent setbacks that greatly reduce the effectiveness of the spending control rule. “About the non-configuration of a crime of responsibility when the target is not met, I also think it is very negative. Because when managers are concerned about their CPF, even if the government changes managers, this does not change the fiscal policy much”, declared. He added that the end of mandatory preventive blocking of expenditures, in turn, means that, in practice, very few times will resource contingencies happen. “And without contingency, the adjustment, in relation to the targets, will be very gradual and perhaps insufficient,” he said.

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