Framework threatens Lula with strong spending restriction – 04/13/2023 – Market

The first projections on the effect of the new fiscal rule on government spending indicate that the model presented by the Ministry of Finance is complex and with numerous challenges to be put into practice, the main one being the need to create a new revenue concept to define how much the expense can go up.

Economists’ calculations, which point to a larger-than-expected squeeze, are made at a time when Minister Fernando Haddad (Finance) is under pressure from the PT. Party members express concern about the effect of the proposal on economic growth, at a time when activity is slowing down.

The simulations show that it is crucial to increase tax collection to comply with the proposal and also indicate that, if current concepts of public revenue are used, the second year of Luiz Inácio Lula da Silva’s (PT) term runs the risk of being marked by a budget constraint stronger than expected by the government.

In the world of public finance, there are different types of income. During the official announcement of the new rule, representatives of the Ministry of Finance said that the framework would adopt one of the most used concepts, the so-called net primary revenue.

It includes all recipes. The ordinary ones, which are traditional tax collections, and also the extraordinary ones, which fluctuate a lot each year (such as Petrobras dividends and payments for infrastructure concessions to the private sector, such as airports and highways).

From what was detailed during the announcement of the new rule, the government could spend an additional amount in the year that would be equivalent to 70% of the growth in net revenue recorded in the 12 months ended in June of the previous year.

So that the expansion of spending is guaranteed, but without room for exaggeration, the planned design maintains the principle of a spending limit (existing in the current ceiling rule), but in a more flexible format. The pace of increase in expenses in each year will be proportionally linked to the variation in revenues, but always within a range of 0.6% and 2.5%.

Consulted by the report, the Treasury reinforced that it will maintain net primary revenue as a calculation basis, in the 12 months ended in June, but excluding some extraordinary revenues – which indicates that a new concept for revenue is in the making.

The ministry also stated that the growth in expenses allowed in the first year of application of the new rule, 2024, will be above the 0.6% floor foreseen by the framework. In recent statements, Secretary Rogério Ceron (National Treasury) stated that spending for next year would grow by 2.5% —the maximum allowed by the proposed framework.

The bill (bill) with the parameters has not yet been presented. Initially, he would proceed to Congress until Friday (14), but the presentation was for another week. Economists are running simulations with different types of income and terms in an attempt to draw up scenarios.

Among those who pored over data to draw up preliminary projections is economist Manoel Pires, coordinator of the Economic Policy Center and the Fiscal Policy Observatory at FGV Ibre (Brazilian Institute of Economics of the Getulio Vargas Foundation).

He did some simulations with net primary income and others excluding dividends from the account. The type of collection and the deadline give very different results.

The big complicating factor is that primary revenues are losing steam after a big increase in 2022, driven by extraordinary earnings. In January, for example, real growth compared to the same month of the previous year was 3%. In February, there was a real drop of 17% in the same type of comparison.

Adopting net primary revenue for the 12 months ending in June 2023, without deducting any extraordinary revenue, would open up less space for spending.

With the withdrawal of these extra revenues, the record gains obtained in 2022 with Petrobras would leave the spreadsheets (which tend not to be repeated in 2023) —that is, the withdrawal, in this case, will make the revenue grow from a lower level, and therefore at a stronger pace. For the purpose of calculating the rule, this will allow for a higher increase in expenses.

Therefore, the choice of which extraordinary income will be excluded from the calculation will define the expansion of spending in the first year of application of the new rule. This explains the attention that the economic team is giving to this detail in the final stretch of the PL presentation.

The Bradesco bank team arrived, in their preliminary analyses, at a similar conclusion about the effect of changing the definition of revenues.

“The calculation of recurring revenue may be a possibility to increase the spending limit in 2024, eliminating extraordinary revenue obtained in 2022 and enabling a more favorable calculation basis”, says the text of the report on the subject to which the Sheet had access, entitled “Impressions on the first parameters of the new fiscal framework”.

This expedient, however, will have long-term effects, highlights the bank’s team.

“Although, at first, this increases the space for spending, the calculation of recurring revenue would make the rule more rigid in the future, reducing the incentives to seek extraordinary and one-off revenues with the aim of increasing future expenses”, highlights the report.

Bradesco’s team also came to the conclusion that the first year of application of the new rule tends to be one of budgetary tightening, in case the government fails to raise revenues.

“We draw attention to 2024″, highlights the text. “We consider, in all scenarios, a real growth of 0.6% in expenditure subject to limits, due to the real drop in total net revenue calculated up to June this year, according to our projections. in the first year of the rule.”

Economists say that excluding extraordinary expenses could have the effect of giving more stability and predictability to the items that will be considered in the new rule. However, as they create a new concept of recurring revenue, the file may open up gaps for multiple interpretations and even questions in the future.

Whatever the concept adopted, raising revenue is a permanent challenge in the proposal for a new fiscal rule, says Marcos Mendes, another economist evaluating the proposal. Associate researcher at Insper and columnist at SheetMendes was one of the formulators of the ceiling rule.

“We are in a team of six people working to understand the rule, but, preliminarily, it was already possible to see that the proposed model has revenue and expense growth, and you only close the account by increasing revenue a lot”, he says.

“This is because, when the revenue goes up to close the account, you generate other expenses.”

The preliminary result of the survey by the Mendes group points out that, in order to achieve the scenario for the public accounts presented by the Treasury, net revenue needs to rise from 18.1% of GDP (Gross Domestic Product) in 2023 to 20.8% in 2026. This is an increase of 2.7 percentage points in relation to GDP, an advance qualified as “very” high.

Translated into monetary values, it means that the Lula government needs to raise BRL 67 billion this year and another BRL 100 billion per year in 2024, 2025 and 2026.

Mendes recalls that, considering other adjustments made on the revenue side, the main one occurred between 1997 and 2002. At that time, the economic team of Fernando Henrique Cardoso’s government pushed revenue upwards in an effort to generate a primary result and save the Real .

This fiscal effort resulted in an average annual increase in revenue of around 0.77 percentage points of GDP, he recalls.

“Now, we are estimating an effort of 0.88 percentage points of GDP per year”, he says.

“It’s a much bigger tax effort, with the detail that, at that time, the tax burden was low, and there was room to raise taxes and create tax contributions. Now, the tax burden is equivalent to 34% of GDP, and it doesn’t have to where to extract exceptional income to make that leap”, says Mendes.

He reinforces that the government will need to achieve real revenue growth (above inflation) of 3.6% in 2023 and 5%, every year, until 2026.

“That’s a blow over any metric you consider”, says Mendes. “To meet the pre-announced targets, the revenue effort will have to be brutal.”