Framework has loophole for government to raise spending in 2024 – 05/27/2023 – Market

The text of the fiscal framework approved by the Chamber of Deputies has a loophole that can be used by the Lula government (PT) to increase spending in 2024 based on extraordinary revenues.

This type of collection was excluded from the calculation of the general rule to avoid expanding expenditures based on uncertain revenues. But a device inserted in the final stretch of the negotiations has raised doubts and may leave the door open for the adoption of a different understanding next year, if it is convenient for the government.

The fiscal framework provides for an annual expenditure limit that grows above inflation, in proportion equivalent to 70% of the real increase in revenues in the 12 months up to June of the previous year. This percentage must follow a floor of 0.6% and a ceiling of 2.5% per year.

Article 15 of the text says that, after the second bimonthly assessment of primary revenues and expenditures, which will take place in May 2024, the government will be able to increase spending by an amount equivalent to the difference between 70% of the “real revenue growth estimated in this assessment in compared to what was done in 2023” and the value calculated as the actual increase limit for expenses in the Annual Budget Law.

At the Ministry of Finance, the expectation is that expenses will expand by around 1.5% above inflation in the preparation of the LOA, according to the framework rule. But the approved version allows this increase to reach the ceiling of 2.5% next year, in case there is a more expressive gain in collection in 2024.

The 1% differential would be the extra limit obtained by the government for spending in the year.

The article, however, does not make explicit mention of the section of the bill that orders the collection obtained from concessions, dividends, royalties, redemption of abandoned PIS/Pasep resources and tax renegotiation programs (Refis) that are instituted to be deducted from revenues. following the enactment of the new framework.

This point is relevant because of the expense growth rule, which is directly linked to the dynamics of revenues.

Technicians who participated in the discussion of the text approved by the Chamber were consulted by the Sheet and had, as a first reaction, recognize the flaw in the writing of the article, with the consideration that the gap was perhaps not so favorable to the government.

There is an expectation of higher extraordinary collections in the second half of 2023. The high basis for comparison would make it more difficult for the government to show the revenue gain necessary to expand its spending.

Hours later, however, the same technicians changed their understanding and assessed that it is necessary to interpret the device to reach the conclusion that the calculation must follow the permanent rule.

Market economists who noted the dubiousness of the wording say that the most logical thing would be to discount extraordinary revenues, as a general rule. But they warn that the text, as it stands, allows the government to make use of specific measures (such as a Refis) in 2024 and shape the interpretation of the article so that this collection is accounted for and leads to the desired real expansion of 2.5 % in expenses, if you perceive that this objective is threatened.

Sought, the Ministry of Finance said that “the revenues to be accounted for in order to determine the real growth of expenditure are those that exclude extraordinary revenues throughout the period”. “This is what is established by the new sustainable fiscal regime, in the understanding of the Ministry of Finance”, he says.

The report specifically asked about Article 15, but the folder did not clarify whether this reading even applies to the application of this device.

The section targeted by the noise was written at the last minute, on the same Tuesday (23rd) when the basic text was voted. Technicians involved recognize that there is always a risk of lingering gaps in these cases.

A possible correction can only be made in the Federal Senate, where the text went after the conclusion of the vote last Wednesday (24).

Economist Manoel Pires, coordinator of FGV Ibre’s Fiscal Policy Observatory, says that Article 15 was “very confused”.

“The comparison of the revenue projection for 2024 with the total collected for 2023 is not accurate and can lead to confusion. The article does not seem to deal with the same concept of revenue as the expense rule. If the understanding is correct, it is possible to generate revenue gains with specific measures to increase the expenditure for 2024. This can generate legal uncertainty”, he assesses.

Article 15 was the result of one of the most sensitive negotiations within the scope of the discussion of the fiscal framework in Congress.

Afraid of not having room to accommodate the growth in expenses in 2024, the Ministry of Finance asked the rapporteur, Deputy Cláudio Cajado (PP-BA), to set the increase in expenses at a ceiling of 2.5% in the first year of the rule , which generated enormous noise in Congress and in the financial market.

To undo the discomfort, the rapporteur adjusted his opinion and included a compromise that initially restricts the expansion of government spending, but authorizes the opening of new credits in case of a positive surprise on the revenue side.

In calculations by the Chamber consultancy, the text approved by the deputies should result in an initial increase in the expenditure limit of 1.15% to 1.8% above inflation.

If it manages to raise the collection next year to take advantage of the device of article 15, the government will be able to spend an extra R$ 15 billion to R$ 28 billion in 2024, according to estimates by the Chamber.