Government studies adjustments in framework during proceedings in Congress – 04/19/2023 – Market

After sending its proposal for a new fiscal framework to Congress, the government is considering making adjustments to the text. The possibility of expanding the list of expenditure exceptions is analyzed (although, according to those involved, with a marginal fiscal impact), in addition to making the use of inflation more flexible in calculations and clarifying the mechanism for reducing the expenditure limit in case of non-compliance with the target.

As anticipated the Sheet, the government included in the proposal a list of 13 exceptions to the expenditure limit – such as the investment made by the National Treasury in non-financial state-owned companies. There is an assessment that certain concepts similar to those in the list should also be considered.

The interpretation exists even after the market reaction to the list of measures excepted from the spending cap (similar to the current spending cap, which will be revoked with the implementation of the new framework). Despite this, the government plans to act so that the modifications do not open the door to the multiplication of exceptions.

According to the participants in the discussions, the new items being studied to compose the list would cause an effect considered small for the public accounts – in the billions (in the singular) of reais, at most. They point out that the discussions will be of a conceptual nature and, therefore, rule out a significant effect on the primary result.

In addition, a modification is studied that would give each elected president the power to choose the inflation index to calculate the framework numbers. The objective is to remove the rigidity of the proposal on this point, which uses the IPCA (Ample National Consumer Price Index) as a reference.

Finally, members of the government analyze that it may not have been clear in the text how the government should cut the spending limit for the year if the surplus for the previous year was below the lower limit of the target – which requires a lower real growth in expenses (instead of 70% of net revenue for the 12 months ended in June of the previous year, the percentage would change to 50%).

This point is important because the fiscal framework proposed by the government foresees that the proposed Budgetary Guidelines Law (sent to Congress in April) and the Budget project (in September) be presented to parliamentarians before verifying the primary result –which only takes place at least at the end of January of the following year.

This opens up the possibility of situations in which the Budget is approved by Congress and sanctioned by the Presidency of the Republic and only afterwards is the result obtained for the year verified —which will require a reduction in the budget allocation during the year. Asked about the procedure for this to be carried out, technicians recognized the possibility of improving the text to make the mechanism clearer.

The format of the fiscal framework took months of discussion in the government and, according to reports, it was preferable to send the text as it was so that eventual needs for improvement could be discussed later together with the parliamentarians.

The framework could be sent to Congress by the end of August, but Minister Fernando Haddad (Finance) decided to anticipate the presentation given the strong market expectations about the rules and, therefore, about the scenario for public accounts in the coming years.