Fiscal framework will allow Lula to reach 2026 well – 01/04/2023 – Samuel Pessôa

On Thursday (30), the general lines of the new fiscal framework were presented. We have to wait for the details, but the principle is that the growth rate of real public spending, that is, above inflation, will oscillate between 0.6% and 2.5% per year.

The Union’s primary spending growth will be 70% of the previous year’s revenue expansion, if it is greater than 0.6% and up to the limit of 2.5%. Otherwise, the increase in spending will be 0.6% as a floor and 2.5% as a ceiling.

That is, we have a growth band between a ceiling and a floor. Where inside the band we are (when we are neither at the ceiling nor at the floor) will depend on revenue growth.

Additionally, there are primary surplus targets which, if not met, reduce expenditure growth for the subsequent year by 50% of revenue growth, instead of 70%.

This rule will establish that spending growth will almost always be less than revenue growth. As revenue grows along with the economy, the rule provides for a reduction in spending as a proportion of GDP (Gross Domestic Product). It is a correct rule for an economy that has a chronic fiscal imbalance.

There are three major doubts and qualifications to the rule. First, today health spending is linked to revenue growth. If total spending grows less than revenue, there will, over time, be an increase in the share of health spending as a proportion of total spending.

Ideally, in 2023, health expenditure should be recomposed to the appropriate level assessed by the government. From that point on, the growth rule for health spending would be the same as for total spending, 70% of revenue growth, with the floor and ceiling.

Second, linking to income will make the rule more procyclical than a spending cap. The fact that spending growth is lower than revenue growth does not eliminate procyclicality. This occurs because, when revenue grows, spending also grows. Floor and ceiling moderate this problem.

The third problem is that the rule is insufficient. In addition to the rule, the government announced primary surplus targets from 2024 to 2026, respectively of 0% of GDP, 0.5% and 1%. The rule simulation does not generate these surplus values. Something between 1% and 1.5% of GDP is missing.

For this trajectory of primary surplus established by the government to materialize, an increase in the tax burden will be necessary. It is not clear what tax bases will be explored.

President Lula’s mantra has been “we need to put the poor on the budget and the rich on revenue”. Therefore, everything suggests that, when the revenue raising measures come, they will focus on taxes on high incomes.

Two are the most obvious areas of taxation on high incomes. First, closing tax planning space that allows companies’ tax profit to be systematically lower than accounting profit. This is a measure for companies that operate on a real profit basis.

For companies that operate under the Simples regime and the pejotinhas, the agenda is to tax the distribution of dividends. Special tax regimes are a clear case of tax avoidance.

Evidently, for the gain in revenue to help reduce the public debt, it cannot be shared with states and municipalities or linked to other spending lines.

The approval of the fiscal framework with this increase in collection, associated with the approval of the indirect tax reform, which will greatly improve the business environment in Brazil, will create space for Lula to reach 2026 well. And the country too.

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