Government wants to reinterpret fiscal framework to spend more

The rapporteur of the Budgetary Guidelines Law (LDO), deputy Danilo Forte (União-CE), found a way to meet the government’s request to set the maximum value for blocking the Union’s expenses in 2024 at R$23 billion – instead of R$ 56.5 billion initially foreseen.

In the report he presented on Thursday afternoon (7), Forte added a device that will help the government not have to make so many spending cuts in an election year, after having rejected an amendment with the same objective proposed by the government leader in the Congress, Senator Randolfe Rodrigues (no party-AP).

According to the rapporteur, the alternative he found avoids the “legal fragility” of the government’s amendment, based on a controversial reinterpretation of the fiscal framework, and also makes possible the desire of the Minister of Finance, Fernando Haddad Fazenda, to be able to spend more at the beginning of next year .

The relief of R$33.5 billion in the need for spending contingencies until March required other arguments from the rapporteur to prevent a blockade estimated by Chamber consultants at up to R$56.5 billion, which would directly affect public investments and threaten payment of parliamentary amendments. The solution he found was to make reservations about expenses that cannot be limited during execution, based on provisions of the Fiscal Responsibility Law (LRF), including health surveillance and resources from the Safra Plan.

With this maneuver, the deputy ensured a 0.6% increase in spending above inflation, as Haddad wanted. The text should be voted on by the Mixed Budget Committee (CMO) next Tuesday (12).

For Senate budget consultants, the rapporteur’s move to create contingency limits does not, however, free the government from the primary result target and the consequences of non-compliance with the fiscal framework, with future blockages and reduction of the expenditure adjustment factor in the following year, from 70% to 50% of the variation in revenue, in the range of 0.6% to 2.5% above inflation.

They assess that the main negative effect of the measure will be to stimulate more distrust about the rigidity of fiscal policy, signaling a greater increase in public debt and resistance in interest rates.

Felipe Salto, chief economist at Warren Investimentos, explains that the measure will make it even more difficult to meet the fiscal target. “The fiscal framework rule is very clear and set out in a complementary law. It does not represent a command to execute spending, as was the case in the old ceiling of PEC 95/2016 [teto de gastos]. It is a rule for the expense limit, a budgetary rule. With this interpretation given in the PLDO [Projeto de Lei de Diretrizes Orçamentárias]it sets a bad precedent.”

A few days before Congress voted on the 2024 Budget, the Finance Minister had been calling for the reinterpretation of the rules of the fiscal framework as a means of mitigating the size of the spending cut due to the expected failure to meet the zero deficit target. However, Danilo Forte warned that he would not accept the amendment in this regard, presented by the government leader in Congress. The amendment authorized the expansion of 0.6% to 2.5% of the Union’s effective expenses, setting 0.6% as a floor for spending growth, thus circumventing the blocking triggers provided for by the framework itself.

For technicians from the Mixed Budget Committee (CMO), the government could not change the rules by amending the LDO, but only via the fiscal framework, approved in July through Complementary Law 200/2023, which replaced the spending ceiling. With this, the LDO rapporteur assessed that the change forwarded by Randolfe brings legal uncertainty by violating the current public accounts framework.

Reinforcing this thesis, a recent opinion from the Chamber’s Budget Consultancy condemned the limitation of the 2024 spending block based on the so-called “growth floor” of spending provided for in the framework. Danilo Forte’s stance increased tensions with the government and reintroduced the debate on the primary deficit target. But the tendency is still for it to be reviewed only in March.

In parallel, Câmara and Planalto also disputed how to measure the effects of budget cuts on Union investments, parliamentary amendments and the electoral fund. The rapporteur ended up setting the expenditure on municipal elections at R$4.9 billion, more than double that proposed by the government.

The consultants claim that the interpretation given by the government subverts the logic of the law that created the fiscal rule, sanctioned three months ago. According to their calculations, the maximum blocking limit would be R$56.5 billion in 2024. Representative Pedro Paulo Teixeira (PSD-RJ), one of those who requested the consultancy’s technical note, considers it risky for the government to continue in this vein, remembering that “financial control is not budgetary control”.

Teixeira explains that the framework law enshrines the coexistence of two fiscal rules: the primary result target – difference between primary revenue and expenditure, minus interest expenses –, provided for in the Fiscal Responsibility Law, and the expenditure limit rule.

The controversial interpretation of the Treasury established minimum annual growth for “budgeted expenditure” (provided for in the budget law), but suggests that this increase would be the floor for “realized expenditure” (what the government spends throughout the year), prevailing over the primary result target, which foresees zero deficit. This would mean that if revenue does not reach the target, spending must increase anyway.

Zero deficit target returned with promise of minimum lockdown

Randolfe Rodrigues’ amendment was presented last month during discussions on whether or not to continue the zero deficit target. Its maintenance, after being questioned by President Luiz Inácio Lula da Silva (PT), was considered Haddad’s victory over the Planalto wing opposed to austerity, led by minister Rui Costa (PT).

Economists Marcos Lisboa and Marcos Mendes, professors at Insper, had been warning through articles about the risk of “creative interpretations” to circumvent contractual obligations with society. For them, the Treasury’s proposal stands in stark contrast to the Fiscal Responsibility Law (LRF), which imposes on the government the pursuit of the primary target, and may make contingencies when revenue is insufficient.

Felipe Salto, chief economist at Warren Rena and specialist in public accounts, also expressed concern about this reinterpretation of Complementary Law 200/2023. For him, the application of the new interpretation could increase the mismatch between expenses and revenue, deepening the fiscal risk. Salto argued that the attempt to negotiate the total to be blocked to avoid fiscal triggers could introduce a high volume of non-mandatory expenses that would escape the cut provided for in the legislation.

Parliamentarians fear that cuts will affect amendments to the Budget

The search for an alternative, which the fiercest critics call “fiscal pedaling”, reflects the state of mind of both the Planalto leadership and part of Congress, which resist the scenario of significant cuts in spending in the middle of an election year. They fear that contingencies will reach parliamentary amendments. Lula himself made it clear that he doesn’t want to know about cutting federal investment funds in infrastructure.

Haddad promised to make contingencies of “at most” R$22 billion to R$26 billion of Budget expenses in 2024 at a meeting on November 16, when the government officially announced that it would maintain the goal of zeroing the deficit in public accounts. The commitment functioned as a guarantee for investments under the Growth Acceleration Plan (PAC) and parliamentary amendments.

The insistence on changing the fiscal rule also insinuates that the government is less confident in voting on projects aimed at increasing revenue and balancing the accounts next year. Among the main projects under discussion is the one that regulates tax exemption for tax credits, arising from subsidies for investments – Provisional Measure (MP) 1185/2023, called the Subsidies MP. In this proposal alone, R$35 billion in extra revenue is expected in 2024.

Experts see confusing fiscal framework and risk to credibility

For financial analyst VanDyck Silveira, “it was a terrible idea” by the government and parliamentarians to change rules for the growth of real expenses in case the fiscal target was not reached.

“The fiscal framework has not even been tested and we can already hear calls to change it in the corridors of Congress and Planalto. If this occurs, we will have serious consequences such as the discredit of economic policy, an increase in fiscal risk and the cost of public debt, in addition to the impossibility of reducing interest rates in the quantity and speed necessary to reactivate the economy”, he said.

Economist, professor and state deputy Claudio Branchieri (Podemos-RS) warns that the controversy arose during the processing of the framework, when the “blockable minimum of 0.6%” was being discussed.

“This 0.6% is the minimum growth in expenditure in real terms. There is no lockable minimum, but there is a lockable maximum, which is 25% of discretionary spending”, he highlighted. For him, Haddad is making a biased interpretation of the framework.

“The point is that the framework does not bring unity in its spending rules. One can conflict with another, and it is not clear which one should be preponderant, in case of divergence”, he observed.

The parliamentarian explains that Haddad considers the growth of expenditure to be predominant and, for this reason, he does not see the need to make contingencies beyond R$ 23 billion in 2024. “It happens, however, that to comply with the primary rule, it is necessary to make more contingencies, threatening the other rules”, he said.