If he fails to meet the target in 2024, Lula will only have to curb spending in 2026

If financial market expectations are confirmed, failure to meet the target of zeroing the primary deficit in 2024 would force the federal government to reduce the expenditure growth limit, as determined by the new fiscal framework. But this restriction would only be imposed in 2026, the last of the current term of Luiz Inácio Lula da Silva (PT).

This is because Complementary Law 200, which establishes the new tax regime, provides for the need for greater control over expenses only after the calculation of the primary result – and the consolidated data for 2024 are only published on January 31 of the following year, when the 2025 Budget must already be approved by Congress.

It is worth noting that, in addition to being late, this type of punishment for non-compliance with the fiscal target will not force the government to reduce its spending, but rather to reduce the speed of increase. In other words: he will be able to continue increasing expenses, but at a slightly slower pace.

The main premise of the new framework, sanctioned by Lula at the end of August, is, roughly speaking, to limit the growth of public spending to 70% of the increase in revenue. The text also establishes primary result targets and imposes a reduction in the variation in expenses in case of non-compliance.

The target set for the 2024 fiscal year is a neutral result, that is, zero deficit. For 2025, a surplus equivalent to 0.5% of Gross Domestic Product (GDP) is required and for 2026, 1% of GDP.

The primary result may still vary within a tolerance range, equivalent to 0.25 percentage points of GDP. Even with this margin, however, market analysts are skeptical about achieving the goal in 2024.

The original version of the framework provided for a brake on expenses in the year following non-compliance

The first version of the new framework project (PLP 93/2023), sent by the Executive to Congress on April 17, said that, if the primary result was lower than the lower limit of the tolerance interval, “the real variation in expenditure of the following year” would be readjusted.

At the time, the text provided that, in this case, the limitation would be 50% of the variation in revenue for the years 2024 to 2027 and left the definition of the ceiling for the following four-year periods to the Annual Budget Law (LOA) at the beginning of each legislature .

The procedure had been described by the Minister of Finance, Fernando Haddad, in a press conference on March 30th. “If by chance not only are the results targets not achieved, but they fall short of the band, then, yes, you have a correction mechanism for the following year, which is to reduce the possibility of expanding vis-à-vis expenses from 70% to 50%. -à-vis the increase in revenue seen in the previous year.”

A page of questions and answers about the proposal, published on the Ministry of Finance website in April, also says that “if the primary result falls below the band, the increase in expenses is limited to 50% of the growth in primary revenue in the following fiscal year .”

Change was made to the first replacement of the new framework project

The change occurred in the first substitute presented by the project’s rapporteur in the Chamber, Cláudio Cajado (PP-BA), on May 16. In the new version, the primary expenditure limit would fall to 50% of the real variation in revenue, “if the primary result target determined in the year prior to the preparation of the Annual Budget Law [LOA] has not been fulfilled.”

As the LOA is always approved in the year prior to its execution, the device ends up pushing the expense restriction to two years after the year in which the target was missed. The wording was kept in the Senate and sanctioned by Lula.

In general, the detail went unnoticed. An article published by the state-owned Agência Brasil at the end of August, after the approval of the text in the Senate, incorrectly mentions that “if the primary result is below the minimum band limit, expenditure growth for the following year drops from 70% to 50% revenue growth.”

Felipe Salto, chief economist at Warren Rena and former director of the Independent Fiscal Institution (IFI), reinforces that the sanctions provided for in the new fiscal rule are not triggered immediately even if official government projections point to a breach of the primary result target.

“Verification of the fiscal target [de 2024]properly speaking, will only happen on January 31, 2025, when the Central Bank publishes, in the Fiscal Statistics Note, the primary result ‘below the line’ (that is, calculated by the variation in net fiscal debt) for the closed year 2024.” , says the economist.

“The tightening of belts materialized in the lower growth of the expenditure limit will only happen when the PLOA 2026 is drawn up, which should be sent to Congress in August 2025, with a factor of 50%, not 70%”, he explains.