Framework: expenditure will grow 1.7% above inflation in 2024 – 08/31/2023 – Market

Federal government expenses will grow 1.7% above inflation in 2024, the first year of validity of the new fiscal framework, a rule created by the government of Luiz Inácio Lula da Silva (PT) to replace the spending ceiling, now officially revoked.

In all, the government will have an expansion of R$ 128.93 billion in relation to the limit in force this year. A good part of the additional space will be consumed by mandatory expenses, such as social security benefits, assistance, the Health and Education floors and the new minimum value for investments.

Part of this amount, BRL 32.42 billion, is subject to the approval by congressmen of a supplementary credit next year, to incorporate gains from the acceleration of inflation until the end of 2023.

The values ​​are detailed in the 2024 Budget proposal, sent by the government to the National Congress this Thursday (31). The document was made available by the CMO (Mixed Budget Committee).

The new fiscal framework allows expenses to increase above inflation, as long as the 0.6% to 2.5% range is respected. The definition of the exact percentage depends on the collection: the formula predicts that it will be equivalent to 70% of the real increase in revenues in the 12 months accumulated until June of the previous year (in this case, 2023).

The government observed an expansion of 2.43% in revenues in the period, after discounting inflation. Therefore, by rule, the actual possible expansion of expenses is up to 1.7%.

However, the framework contains a loophole for this percentage to be higher in the first year. The Executive may, in May 2024, incorporate an additional amount, if the estimate for next year’s collection indicates a better performance than the advance of 2.43% already detected.

In practice, the device leaves the door open for the government to achieve the 2.5% expansion, sought since the beginning by the economic team.

The expansion is considered necessary to accommodate a series of expenses that will be resumed, including the Health and Education floors, which are once again linked to the collection dynamics.

The constitutional rules, which will come into effect once the framework is sanctioned, allocate 15% of RCL (current net income) to Health and 18% of RLI (net income from taxes) to Education. The bill results in a higher minimum than what has been applied under the spending cap—hence the need for more space to accommodate expenses.

As shown to Sheetthe government also included R$ 168 billion in measures to increase revenue and, thus, manage to deliver the Budget within the fiscal target of zeroing the deficit in 2024. The measures still need approval by Congress or implementation by the Executive.

The degree of uncertainty surrounding these sources of revenue has fueled pressure within the government to re-discuss the fiscal target by the end of this year.

The Ministry of Finance sees the movement as “friendly fire”.

The portfolio assesses that the rebalancing of the accounts is essential to stabilize the path of the public debt. Therefore, the goal of zeroing the deficit is not a “workhorse”, says a member of the economic team, but rather a target to be pursued and with which one seeks to convince the Legislature of the need to approve the measures.

Minister Fernando Haddad (Finance) admitted earlier, this Thursday (31), that the fiscal scenario for 2024 is challenging, but stated that the government is committed to moving forward with the necessary measures to rebalance the country’s accounts.

“We are not denying the challenge, we are not denying the difficulty. What we are affirming is our commitment, the commitment of the economic area to obtain the best possible result”, he said at a press conference.