Framework: Government and rapporteur talk about ‘writing adjustment’ – 05/22/2023 – Market

The fiscal framework must undergo “drafting adjustments” to try to eliminate the perception that the new version of the text creates extra space for the government to spend, said on Monday night (22) the Minister of Finance, Fernando Haddad, and the rapporteur for the project, deputy Cláudio Cajado (PP-BA).

The two avoided detailing the changes, but they also did not want to commit to maintaining the device that set a real increase of 2.5% in the expenditure limit that will be in force in 2024 —one of the main reasons for criticism since the publication of the opinion, last week.

According to people interviewed by Sheetthere is pressure from centrão politicians for this device to be removed from the text.

“When I say make it clearer, I mean this: it just makes it clearer. It can promote small changes that prevent the misinterpretation that is sometimes made of a device, about how much it means”, said Haddad to journalists when asked about the maintenance of the high of 2.5% above inflation next year.

“We are going to clarify this issue so as not to imply that my substitute’s report will give an additional R$80 billion. giving absolutely nothing in that sense as a possibility”, said Cajado, who was at the Ministry of Finance on Monday night to discuss the opinion.

The account of up to BRL 82 billion was made by former Secretary of the National Treasury Jeferson Bittencourt and reflects the extra space that the government would have in 2024 with two changes included in the opinion – one of them is the setting of the real increase of 2.5% next year, which alone generates a break of R$ 40 billion.

According to the original rule, the expenditure limit could rise above inflation by the equivalent of 70% of the real rise in revenues, respecting the range of 0.6% to 2.5%.

The government had expected that the calculation for 2024 would be close to the ceiling, but Bittencourt projected a more timid increase of 0.6%. Other experts were also predicting a rise of close to 1%.

The own estimates of technicians from the Chamber of Deputies pointed to a growth of around 1.9% to 2%, that is, lower than expected by the government.

On Thursday (18), Cajado confirmed the existence of an extra space due to the change, but contested the market calculation and said that the value was lower. The increase would be from R$ 10 billion to R$ 12 billion, according to the Chamber’s consultancy.

The disclosure of the numbers caused unease in Congress, as it represents an endorsement for a new increase in spending, after an extra authorization of R$ 168 billion in expenses for 2023 granted through the PEC (proposed amendment to the Constitution) approved at the end of last year.

The expansion of the limit in 2024 will be calculated on top of the amount already expanded in 2023. Among parliamentarians, there is a fear that this will lead the government to increase the tax burden in order to obtain the necessary resources to pay for these expenses without failing to meet the result targets primary —calculated by the difference between spending and revenue.

There is still pressure to exclude Fundeb (Fund for the Maintenance and Development of Basic Education) from reaching the limit of the framework, which would have support from party leaders including in the Senate. The argument is that education is an investment.

In the original proposal of the Ministry of Finance, Fundeb’s expenses were outside the expenditure limit, just as it is today in the expenditure ceiling —current fiscal rule, which limits the increase of expenses to the variation in inflation.

However, Cajado decided to include these transfers in the framework. On Monday, the Secretary of the National Treasury, Rogério Ceron, said that the decision tends to make the fiscal space smaller in the medium term.

“He [Cajado] it also placed some exceptions that had been forwarded in the original project into the ceiling. Fundeb has an important effect of occupying budgetary space on the ceiling,” he said.

Questioned about this statement, the rapporteur countered by saying that other expenses also grow, as well as the collection. “I don’t think that reasoning is logical,” he said.

In the evaluation of deputies from the center, a wing of senators would be interested in withdrawing Fundeb resources from the fiscal rule as a gesture towards the government. With that, the eventual wear and tear of including the fund again would be with the deputies, when the text returned to the Chamber.

However, there are deputies linked to the area of ​​education who have also asked for the exclusion of Fundeb from the limit of the framework.

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UNDERSTAND THE CONTROVERSY OF FRAME NUMBERS

What does the rule proposed by the government say?
The fiscal framework project foresees an expenditure limit that would be corrected by the accumulated inflation from January to June of the previous year, plus the projected variation for the price index between July and December.
In addition, expenditure could have a real growth equivalent to 70% of the increase in government revenues in 12 months until June of the previous year. The expansion of expenses above inflation, however, must respect the floor of 0.6% and the ceiling of 2.5% per year.

How was the rule in the rapporteur’s opinion?
The rapporteur changed the inflation horizon to adopt the variation observed in 12 months up to June of the previous year —the most recent information available in the elaboration of the Budget proposal. By eliminating the projection portion, Congress hopes to reduce the degree of freedom the government would have to raise the estimate and thereby inflate its spending.
At the same time, the rapporteur authorized the government to increase the amount of expenditure, in case inflation in the second half of 2023 is higher than that observed in the same period of 2022. The difference in 2024 may be permanently incorporated into the spending limit , serving as a basis for the correction of the ceiling in subsequent years.
In another change, the rapporteur set the percentage of actual increase in the expenditure limit at 2.5% in the first year of validity of the new rule. This is the band ceiling stipulated in the proposal.

What is the consequence of the modifications?
Market economists saw the changes as a maneuver to inflate the spending level for 2024 and, consequently, the basis for calculating the limit in subsequent years. The different impacts are:
Up to BRL 40 billion, according to ASA Investments, or BRL 19 billion, according to XP Investimentos, due to the fixation of the real gain of 2.5% in 2024. Analysts expected a lower revenue growth and, by extension, an advance more shy of the spending cap in the first year. The difference in projections results in an increase in fiscal space.
Up to BRL 42 billion for ASA Investments, or BRL 49 billion for XP, due to the change in the correction for inflation and the authorization to adjust the 2024 limit for the higher inflation at the end of this year.

What does the rapporteur say?
Deputy Cláudio Cajado (PP-BA) confirmed the creation of an extra space in 2024 with the changes in the report, but contested the market numbers.
According to him, the Chamber itself had a more timid growth estimate for the expenditure limit in 2024 (1.9%). The government, on the other hand, expected to reach the ceiling of 2.5%. “This 0.6% difference would reach a maximum of R$12 billion,” he said in a note.
Regarding the correction for inflation, Cajado said that the change would imply a smaller readjustment of the ceiling, as inflation at the end of 2022 was low due to the fuel exemption adopted by former President Jair Bolsonaro (PL). In the accounts of the rapporteur, the cut would be equivalent to about R$ 40 billion.
“What we did, therefore, in the substitute, was to create a rule [para] that there was no such loss”, he said. He argued that the opinion only maintains an increase in expenses that had already been foreseen by the government in the original project. “The substitute is not adding any value to what was proposed by the government.”

What does the government say?
Minister Fernando Haddad (Finance) said that “there is no way” the extra space provided by the report could reach R$80 billion.
According to him, the setting of the 2.5% increase in the first year was adopted to avoid “a problem”, since many of the revenue recovery measures adopted by the government at the beginning of the year will still not have influence on the framework in 2024 for allow greater expansion of expenses, only in the following years.
The government itself proposed that the spending limit be linked to the real increase in revenue in the 12 months up to June of the previous year.
“The re-encumbrance of fuels that was carried out by this government in the first semester, for example, the increase in revenue was not captured. Several measures taken in this first year of government were not captured by the Federal Revenue Service”, said Haddad.