Framework differs from 70% of countries with fiscal rule by not requiring adjustment counterparts – 04/29/2023 – Market

About 70% of the countries that have tax rules have some law or rule that requires the adoption of corrective measures in case of non-compliance with the established criteria. According to a survey published last year by the IMF (International Monetary Fund) based on data from 2021, there were at least 72 countries out of a total of 104.

Currently, Brazil is part of the majority group because of the spending cap rule —which prevents real growth in federal spending. The country also stands out for being among the few that put the rule in the Constitution, alongside economies like Denmark.

Over the past few years, the world has gone through the trend of institutionally strengthening control over public accounts, says the IMF. More than 40% of rules that seek budgetary balance are now supported by fiscal responsibility laws or regulations that specify numerical targets and procedural and transparency requirements — twice as many as in the early 2010s.

The government’s proposal for a new fiscal rule in Brazil, sent to Congress this month, goes against this trend. It does not require rigid counterparts for correcting the route and makes the application of the LRF (Fiscal Responsibility Law) more flexible. If the parliamentarians confirm the proposal, Brazil will occupy a place in the group of less demanding countries, which is smaller every year.

The IMF document, entitled “Fiscal Rules and Advice – Recent Trends and Performance during the Covid-19 Pandemic”, assesses the easing of fiscal frameworks during the health crisis. It identifies, for example, that two thirds of the tax rules already had an escape clause to suspend requirements in extraordinary situations.

The introduction of the study, however, provides a global balance of the evolution of the rules. In the early 1990s, he points out, only ten countries had fiscal rules. The work also cites the growth of norms detailing actions to get back on track after a deviation.

Experts claim that sanctions do not always need to be applied, but their mere existence enforces a principle of the fiscal rule: to provoke discussion about the balance of the Budget.

The US rule is an example. Determines debt limit, which sets the maximum amount that the government can borrow to meet obligations. The Executive has no autonomy to change the ceiling. It is up to the Legislature to authorize the raising of the limit, under penalty of shutdown (paralysis) of the public machine.

The mechanism requires negotiation between the Powers. Negotiations have already reached the eve of the deadline, but there has never been a suspension that actually stopped everything.

Most countries follow supranational tax rules, adopted by integration blocs. This is the case for the countries of the European Union.

Integration encourages fiscal rigor in the continent since the signing of the Maastricht Treaty, in 1992. The agreement established debt and primary deficit criteria for countries interested in participating in the economic and monetary union.

In case of non-compliance, the member country must submit a course correction plan, to be applied within a period of up to 20 years, to Ecofin (Council for Economic and Financial Affairs). The body brings together Ministers of Economy and Finance from all member states.

A plan has never been rejected, but the rule provides that, if the proposal is not endorsed by Ecofin, the member country may suffer penalties, such as suspension of transfers or even payment of fines.

The 2012 fiscal pact in the bloc tightened the requirements to avoid excessive fiscal deficits, which led to a strengthening of local instruments. Austria, for example, gave more power to its court of accounts and adopted sanctions in case of non-compliance. Poland has established preventive triggers, which are activated as the debt approaches the fixed limit.

The demand for counterparts is still weak in Latin America in general.

This is demonstrated in another document on the subject, the Survey on Budget Practices and Procedures. The survey was carried out in 2018 by the OECD (Organization for Economic Cooperation and Development, which concentrates richer countries) and the IDB (Inter-American Development Bank, which operates in the region).

Senior government officials from 11 Latin American and Caribbean countries and 34 OECD members were interviewed.

In the OECD, nine countries required the adoption of corrective measures when the rule was not complied with. In Latin America, four, including Brazil (because of the ceiling).

Among the countries highlighted by the IDB because of the effort to seek fiscal counterparts is Costa Rica. The Comptroller General of the Republic does not approve the budget of any public institution if it has not been reviewed by the Budgetary Authority. This body, which forms part of the Ministry of Finance, has the duty to verify compliance with the fiscal rule for each ministry and public sector institution.

In a technical note released on Thursday (27), the Budget Consultancy of the Chamber of Deputies evaluated the criteria of PLP 93/23, as the complementary bill presented by the government with the model of the suggested new rule is called. The proposal admits a primary result below the lower tolerance limit of the target for the year and presents an express denial of responsibility for non-compliance.

The technicians’ assessment is the same as that of financial market analysts: without a firm commitment to positive primary results, debt sustainability is not guaranteed.

The proposal also disregards items of the Fiscal Responsibility Law. This norm, in force since 2000, determines that the LDOs (budget guidelines laws) establish primary or nominal result targets and that, bimonthly, assessments of the conditions for meeting the target are disclosed, providing for the mandatory adoption of budgetary and financial limitations (contingency ) if there is a risk of non-compliance.

The PLP makes the contingency throughout the year optional, even if there is a risk of a possible non-compliance with the target at the end of the year.

In case of actual non-compliance, the framework foresees a lower growth in expenses (which, however, continue to advance at real levels). In addition, in this case, it determines that the President of the Republic sends a message to Congress presenting the reasons for the non-compliance and the corrective measures. However, the effective application of these initiatives is not mandatory.

EXAMPLES OF FISCAL CONSIDERATIONS

• EUROPEAN UNION: member countries that fail to comply with the bloc’s goals must present a recovery plan to the Council of Ministers of Economy; in case of non-approval, there may be loss of transfers and payment of fines
• USA: Executive needs to negotiate with Legislative to have high debt limit and avoid stoppage of public machine
• POLAND: has a trigger system that restricts the Budget in the event of non-compliance with targets, a model similar to the Brazilian ceiling
• COSTA RICA: Budget authority monitors state and ministries spending, which may have limited transfers in case of excessive spending