Framework: see the rapporteur’s changes point by point – 05/16/2023 – Market

The rapporteur for the proposed new fiscal framework, Cláudio Cajado (PP-BA), presented this Monday (15) his opinion with points that make the text originally sent by the government less lenient. Despite this, the new version still provides flexibility for executing expenses even in the event of non-compliance with the target.

The main changes made by the deputy are the reduction in the list of expenses that are exceptions to the rule and the creation of adjustment triggers in case the government accounts come in below expectations – such as a ban on public tenders or readjustments for civil servants.

The foreseen triggers are triggered gradually, but can be waived if the government presents a proposal for total or partial suspension that is accepted by Congress and that shows that the accounts will adjust from the measures adopted.

Another point changed by the rapporteur was to insert the government’s obligation to limit expenditures during the year, in case there is a prospect of revenue frustration or an increase in other expenditures that threatens compliance with the lower limit of the fiscal target for the year. The task is similar to what the Fiscal Responsibility Law requires today, but the government intended to make the rule more flexible through the new framework.

Now, the rapporteur innovates by proposing that the discretionary contingency should be limited to 25% of its total. In addition, it decriminalizes non-compliance with the goal if the manager takes the necessary measures to achieve it – including contingency.

Cajado removed some items originally proposed by the government from the list of exceptions to the spending limit. Among them, National Treasury investments in state-owned companies and transfers to states and municipalities for the payment of the nursing floor.

In practice, this means that these policies will compete for space in the Budget with other programs, and their eventual faster growth may require cuts in other areas —which works as an incentive for the government to keep them under control.

Cajado’s schedule provides for the approval of the emergency regime this Wednesday (17) and the fiscal framework itself on Wednesday of next week (24).

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.