Framework: Changes made by the reporter divide analysts – 05/16/2023 – Market

The changes made by the rapporteur for the new fiscal framework, Cláudio Cajado (PP-BA), in the government’s proposal divide experts heard by the Sheet. On the one hand, the inclusion of locks is celebrated, but some analysts say they consider them too loose.

The rapporteur presented the opinion on Monday (15). The main changes made in relation to the first text were the reduction of the list of expenses that are outside the rule and the creation of triggers —such as the prohibition of readjustment for civil servants and the holding of public tenders.

For Felipe Salto, chief economist at Warren Rena, the balance of the project is positive. He assesses that the rapporteur improved the original text, especially by linking the eventual breach of the primary result target to a series of adjustment measures already provided for in Article 167-A of the Constitution, causing containment of mandatory spending.

“I also liked the obligation to explain a gross debt trajectory for ten years in the LDO [Lei de Diretrizes Orçamentárias], compatible with the fixed primary result targets. The weakest part is the setting of a maximum real growth of 2.5% for expenditure in 2024. It is a high exit point.”

The former Secretary of Finance for the state of São Paulo also considers that the effect of withdrawing exceptions to the expenditure limit should not be significant. “For Fundeb [Fundo de Manutenção e Desenvolvimento da Educação Básica], for example, was to exchange six for half a dozen. It will now form part of the roof itself and, thus, such expenses will be subject to it. Nothing changes mathematically.”

One of the fathers of the spending ceiling —which will be replaced with the approval of the new framework—, the professor at Insper and columnist at Sheet Marcos Mendes believes that the government’s original project was a model in which the account only closed if the tax burden increased considerably.

“Little has changed in this design with the substitute, the link between health and education could not be dealt with now, the increase in the minimum wage and its consequences are exempt and the increase in the payroll would have an instrument to limit this with greater triggers, in two years.”

Mendes adds that the text allows the Executive not to pull the trigger, arguing that with a smaller set of restrictions it would be possible to return to the target trajectory. “It makes room for lero-lero,” he says.

“The substitute gives some instruments of control, for a government that intends to make a fiscal adjustment, by including points that were outside. But it also gives a lot of leeway for a government that does not want to make a fiscal adjustment. In the first year, the triggers are very weak, and the effect is lagged.”

Unicamp economist Pedro Paulo Zahluth Bastos assesses that the rapporteur’s amendments greatly worsened the framework, which was already very restrictive. According to him, the framework no longer had fat and now it has become very difficult to guarantee economic growth.

“By reintroducing the requirement to contingency expenses for one year, it removes the countercyclical aspect that the framework had, the variation around the target existed exactly in case of an event that produced a sharp drop in revenue.”

He also finds that the change in nursing floor pay tightens what was depressed. “Other expenses will have to grow well below 70%. The government’s strategy of enacting a law imagining that it would be worse was very bad. There was no more fat and now they are cutting back on the meat.”

In a note, XP, in turn, assessed that the project advances at certain points, but the balance is neutral.

Despite maintaining the expenditure limit initially proposed by the government, the substitute already determines that, for the year 2024, the correction of the limits will take place by the maximum allowed by the rule (2.5%), regardless of the revenue measured by the government, says the text.

“As we showed in simulations, the first year was the one with the greatest chance of having lower growth due to the economic slowdown and the relatively high comparison base in 2022.”

The note considers that the substitute has advanced by introducing, gradually, for the first and second year of non-compliance with the target, mechanisms that include a ban on raising civil servants’ wages, holding public tenders and raising expenses above inflation. “However, the minimum wage, which indexes practically a third of the Budget, ended up being left out.”

IMF defends BC action on interest rates and expansion of the tax base

The IMF (International Monetary Fund) supported the government in its plans for a new fiscal framework, the monetary policy of the Central Bank and the expansion of the tax base in a note released this Tuesday (16).

Technicians from the international organization met this Tuesday morning with the Minister of Finance, Fernando Haddad (PT), for a periodic assessment he makes of member countries.

“We strongly support the authorities’ commitment to improving Brazil’s fiscal position. Strengthening the fiscal framework, broadening the tax base and addressing spending rigidity would support sustainability and credibility while providing flexibility, including to meet new priority spending “, said the IMF in a note after the meeting.

In the text, the fund also defends the monetary policy of the Central Bank, which was repeatedly attacked by President Luiz Inácio Lula da Silva (PT) for keeping interest rates at 13.75% per annum.

“Monetary policy is consistent with reducing inflation to the target, in line with the inflation targeting regime that has served Brazil well,” assessed the IMF.

The organization criticized, however, the possibility of greater participation of public banks in the economy. The situation “must be carefully managed to mitigate risks to fiscal sustainability and the transmission of monetary policy”, he analyzed.

Another point highlighted by the IMF was tax reform. “Approval of the authorities’ tax reform project would considerably simplify the tax regime and could increase potential output,” he opined.

Collaborated Lucas Marchesini, from Brasilia

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See the main changes point by point:

OBLIGATION TO CONTINGENCY

• The rapporteur inserted in the text the obligation of the government to limit expenses during the year, in case there is a prospect of revenue frustration or an increase in other expenses that threatens the fulfillment of the fiscal target in the year. The task is required by the Fiscal Responsibility Law, but the government intended to make the rule more flexible through the new framework.

• Rapporteur innovates by proposing that the contingency of discretionary should be limited to 25% of its total.

INCLUSION OF ADJUSTMENT TRIGGERS

If the government accounts present a result below the lower limit of the target, it is forbidden to:

• Career structure change that implies an increase in expenses

• Creation or increase of aid, advantages and benefits of any nature

• Mandatory expense creation

• Measure that implies readjustment of mandatory expenditure above inflation variation, observing the maintenance of purchasing power

• Creation or expansion of debt financing programs and lines that extend subsidies and grants

• Concession or extension of tax incentive or benefit

The measures are valid for one year. If the target is reached the following year, the sanctions are automatically reduced.

The President of the Republic may propose to Congress the partial suspension or greater gradation of the prohibitions listed above, provided that he demonstrates that the impact and duration of the measures adopted will be sufficient to correct the deviation.

Adjustment measures do not apply to minimum wage readjustments defined in the base valuation law.

In the second year in a row of non-compliance, the following is also prohibited:

• General increases and readjustments in personnel expenses

• Admission or hiring of personnel, except to fill vacancies

• Conducting a public tender, except to replace vacancies

REDUCTION OF THE LIST OF EXCEPTIONS TO THE EXPENSE LIMIT

What did the rapporteur take away from the list of exceptions proposed by the government (i.e., items now consume space in the spending cap):

• Expenses with Treasury investments in non-financial state-owned companies

• Transfers to states and municipalities to fund the nursing floor

• Fundeb (basic education fund)

• Federal aid to the security forces of the Federal District through the FCDF (Constitutional Fund of the Federal District)

Here’s the list of exceptions to the spending limit:

1. Constitutional transfers to states and municipalities by way of tax distribution

2. Extraordinary credits, released in unpredictable and urgent cases (such as those resulting from war, internal commotion or public calamity)

3. Expenses funded with resources from donations or judicial or extrajudicial agreements signed due to disasters

4. Expenses of universities and federal institutions, and public companies of the Union providing services to federal university hospitals, when funded with own income, donations or agreements

5. Expenses incurred with funds arising from transfers from other entities of the Federation to the Union intended for the direct execution of works and engineering services

6. Expenses with precatories agreements to be paid with discount

7. Account matching operations with precatories

8. Non-recurring expenses of the Electoral Court with holding elections

9. Legal transfers to states and municipalities of resources obtained from forestry concessions

REVENUE CALCULATION

• Adds to the list of exceptions for the calculation of revenues the special tax recovery programs that are intended to regularize the situation of debtors and generate resources for the Union. As a result, the government will not be able to use this type of resource to expand revenue and, consequently, expenditure for the following year.

• The Rapporteur kept the other items proposed by the government out of the calculation of revenues. They are all revenue from concessions and permits, dividends and participations paid by state-owned companies, and gains from the exploitation of natural resources (which mainly comprises royalties from oil) – in addition to the account with constitutional transfers made to states and municipalities.

BONUS FOR INVESTMENTS

• It goes on to predict that only 70% of the excess surplus can be directed to investments. In the original project, the excess revenue in relation to the primary target could be used, in a single way, to finance works and other investments without affecting the expenditure limit. There would only be a temporary limit, equivalent to BRL 25 billion (adjusted annually for inflation), valid until 2028.