Fiscal framework: even with more space for spending, economists see a possible impact on public policies

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The concern is with the growth of expenses that are corrected by specific rules, such as the payment of pensions, health and education expenses and parliamentary amendments. If they rise too high, they can stifle other government actions. Chamber approves fiscal framework, which will replace the spending ceiling The fiscal framework, the new rule for public accounts approved this week by the Legislature, brings greater space for expenditures than the spending ceiling — a previous norm. Even so, according to analysts interviewed by g1, there may still be a compression of the so-called “free spending” of the ministries, with an impact on public policies. Free expenditures are those that the government is not obligated to make. Paying pensions, for example, is a mandatory expense. The framework’s general rule predicts that the growth of some government expenditures is linked to the growth of revenues. In addition, the increase in expenses cannot rise more than 2.5% per year above inflation (understand more below). The fear is that expenses that obey specific rules (different from the framework) will grow too much. Hence the need for the government to control spending. Some mandatory expenses that comply with specific readjustment rules are: workers’ pensions (linked to the minimum wage) expenditures on health and education parliamentary amendments (indexed to revenue) Expenditure on health, education and amendments, for example, were linked to revenue. They can rise sharply if the government manages to implement the measures it seeks to increase revenue. According to economist Manoel Pires, coordinator of the Economic Policy Center and the Fiscal Policy Observatory at FGV IBRE and former secretary of Economic Policy at the Ministry of Finance, this is a “point of criticism of the new fiscal framework”. “This mismatch between expenses that are endorsed by revenue growth and the new expenditure ceiling, given by the framework, which is 2.5% growth. If revenue grows much more than that, there will be some expenses growing much more and eating up space,” said economist Manoel Pires. The National Treasury assesses that linking expenditures to specific rules, “although it aims at prioritizing these public policies in the budget”, can “make their planning and execution more difficult”. “The high level of ties tends to extinguish allocative discretion [possibilidade de escolha de gastos]as it reduces the volume of free budget resources that would be essential to implement priority government projects that meet the needs of the population at every moment of time”, evaluated the National Treasury in July of that year, through a report. The g1 got in touch with the National Treasury and asked when the possibility of indicating free spending (allocation discretion) will be extinguished, but did not get a response until the last update of this report. , Deputy Cláudio Cajado (PP-BA), in his text, recalls that the new fiscal rule brings a floor of around R$ 150 billion for the free expenses of the ministries.Even so, he predicts a difficult scenario if nothing is done. “Tend, in the last year of the Lula government [em 2026]to have a situation of what it was in the last year of the Bolsonaro government, with great difficulty in paying discretionary expenses [gastos livres dos ministérios]”, declared the Chamber’s consultant, Ricardo Volpe. Spending ceiling X fiscal framework In the old spending ceiling, a regime that was extinguished this week, most expenses could not rise above the inflation of the previous year. Expenses were within that rule. of ministries in health and education. As mandatory expenses, such as social security, rose above inflation, this compressed the space for free spending by ministries – which have suffered blockages in recent years. This led to a lack of resources for some free expenses of the ministries, such as: agricultural defense; scholarships from CNPq and Capes; Pronatec; issuing of passports; Popular Pharmacy program; scholarships for athletes, environmental and labor inspection, among others. Among the free expenses of the ministries, there are also expenses with water, electricity and security of government buildings. In this case, although they are “free”, the expenses have to be made under the risk of paralysis of the public machine. In the case of the fiscal framework, the rule is different from the spending ceiling, but yet there is a limit to the expenses. They cannot rise more than 70% of the revenue rise, and cannot rise more than 2.5% per year, above inflation (an actual rise range of 0.6% to 2.5%) has been proposed. . Understand what the fiscal framework is, point by point A study by the Chamber’s Budget Consultancy shows that, between 2009 and 2016, before the spending ceiling, total government expenditure (not counting the financial budget, public debt) grew by average 4.6% per year in real terms (above inflation). That is, above the limit of 2.5% in real terms of the new fiscal rule. Spending with its own rules The new fiscal rule, in turn, also brought some new expenditure links to its own rules. All these expenses, which are frozen, can grow more than 2.5% in real terms per year (limit of the fiscal framework) and, with that, reduce the space for free spending by the ministries. ▶️ A novelty proposed by the Workers’ Party government was a floor for investment spending. The measure, which tends to raise values ​​to new records, also raised doubts among experts about whether the resources will actually be well spent. ▶️ In addition, the framework resumed the old rule that health and education expenses are readjusted again based on storage. Without this rule, there was a loss of BRL 45.1 billion for Health and BRL 7.2 billion for Education during the term of the spending cap. ▶️ The Lula government also made a commitment to give a real increase in the minimum wage every year. Although this is reflected in the correction of social security benefits above inflation, there is also an increase in budget constraints. In addition, there is also a floor for mandatory execution parliamentary amendments. The rule says that individual amendments cannot be less than 2% of the net current revenue of the previous year, while bench amendments cannot be below 1%. What can be done One possibility to avoid blocking free spending by ministries, according to economists, is to cut mandatory expenses, as this would open up space in the budget. For this to be done, laws have to be changed. Analysts have warned, however, that while it focuses on raising revenue to meet the proposed fiscal targets, the fiscal framework fails to bring clearer indications on the control of public spending and, also, on measures to reduce them. And among the possibilities for reductions in mandatory spending, which would have to go through the National Congress, they cite: Changes or the end of the salary bonus, a policy considered inefficient and poorly focused (which does not reach the poorest); Containment of expenses with public servants through an administrative reform; Merger of social policies to avoid accumulation of benefits. The National Treasury informed, however, that it intends to submit to the National Congress in the second half of this year a proposal to amend the Constitution (PEC) to change the format of correction of the floor (minimum value) of spending on health and education from 2025. In July, the Treasury assessed that one option would be to replace the current health, education and parliamentary amendment indexes (based on revenue growth) with an “index consistent with the global expenditure correction mechanism”, that is, one that would vary from 0.6% to 2.5% in real terms per year. Ricardo Volpe, consultant for the Chamber of Deputies, recommended that, in addition to spending on health and education, the minimum wage should also have the same correction rule as other expenses in the new fiscal framework – something that the economic area did not mention. Manoel Pires, from FGV IBRE’s Fiscal Policy Observatory, agrees that the ideal would be for health and education expenses to have a fixed percentage, but he could not say whether the government will be able to approve these changes in the Legislature. He recalled that the government may propose changes to the “parameters” of the framework through a supplementary law – among them the spending limit of 2.5% per year in real terms. “Tweaking a fiscal rule always generates some noise, but if by the time this has to happen you already have a higher primary surplus and falling debt, this will have a minor impact on this type of discussion”, assessed Manoel Pires.

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