Indefinition of parameters of the new tax rule leads to postponement of the announcement – 03/21/2023 – Market

The lack of definition surrounding the parameters of the new fiscal rule is behind the postponement of the official announcement of the proposal, which should be in April, after the trip of President Luiz Inácio Lula da Silva (PT) and ministers to China.

According to interlocutors interviewed by the Sheetthere are a series of pending strategic decisions, which are decisive for knowing what space the government will have to spend in the future.

The prospect is that the new rule will be announced after the return of the entourage, scheduled for March 31, but before the submission of the PLDO (Budget Guidelines Bill) to Congress, whose deadline is April 15.

Discussions take place under pressure from PT members so that the pace of adjustment in public accounts is more gradual than intended by Finance Minister Fernando Haddad (PT), who aims at a more ambitious goal of zeroing the deficit as early as 2024 .

The assessment among PT members, however, is that a fiscal tightening at this moment could throw the country into a “violent political crisis”, compromising the government’s popularity and opening space for a new rise of the political group of former president Jair Bolsonaro (PL).

The lack of definition of the parameters makes it difficult to present the milestone this week, as had been signaled by Lula and Haddad.

The guideline is to find a way to reconcile Lula’s requests to preserve public investment and social spending (including health and education) and a healthy trajectory of the public debt.

In recent days, Haddad expanded the discussion of the details of the new rule with other ministers of the economic area and with the leadership of the National Congress.

However, according to a government source, the design is still far from being 100% closed. The main open points are not so much related to the operation of the mechanism, but to the variables that guide its operation.

These parameters can be projections for certain economic indicators, such as GDP (Gross Domestic Product) or GDP per capita. There are a series of options on the table, and, depending on the choice, the government will have more or less space for expenses.

In an event this Monday (20), vice-president Geraldo Alckmin (PSB) stated that the new rule will combine the public debt curve, primary surplus and spending control.

Based on these principles, technicians have carried out a series of simulations to find out how expenses evolve and how indebtedness behaves under certain parameters.

The task is complex. As the new rule provides for a medium-term horizon, not just the following year, the intention of the Ministry of Finance is to work with the projected trend for economic variables — unlike the spending ceiling, which operates with the inflation observed in the previous year.

This makes the operation of the rule more delicate and increases the weight and importance of these projections. Some indicators, however, are considered more difficult to be integrated into the rule.

In the case of GDP and GDP per capita, for example, the consolidated data (which serve as the basis for projections) are released with a two-year lag. This can lead to significant variations in forecasts, affecting fiscal space if these indicators are considered in the framework being prepared by the government.

In December last year, the IBGE released the consolidated GDP for 2020 with revisions. The drop in activity in 2020 went from 3.9% to 3.3%, while the expansion of the economy in 2021 was higher, from 4.6% to 5.0%.

It is this risk of strong variations that is being taken into account by the technicians, since the logic is different from a revenue projection, which has real information every month to recalibrate the estimates.

Another issue under discussion is constitutional binding. The approval of the new fiscal framework will result in the repeal of the spending ceiling and, consequently, the rules that currently correct the minimum amounts of health and education expenses only for inflation.

This means the resumption of the constitutional minimums linked to collection, as they were until 2016: 15% of RCL (net current revenue) for health and 18% of net tax revenue in the case of education.

The complementary bill cannot change these percentages, since they are provided for in the Constitution.

According to a government source, the rule will need to be designed in such a way that this logic is compatible with the expense control mechanism that is integrated into the design, to prevent pressure on other expenses over time.

In an article published on the Ibre/FGV blog (Brazilian Institute of Economics of the Getulio Vargas Foundation), economists Manoel Pires, Bráulio Borges and Carolina Resende draw attention to this point. For them, the most sensitive issue will be health expenditure.

With the spending ceiling unlinked the health minimum from the RCL and froze the floor at the real values ​​of 2017 (with replacement only by inflation since then), economists calculated a difference of R$ 22.7 billion in relation to the original rule.

This amount was recomposed in the PEC (proposed amendment to the Constitution) of the Transition, which paved the way for increased spending in 2023, but there is concern about the dynamics of this spending in the future.

“The new fiscal rule will have to incorporate the fact that, over the next few years, this expenditure will grow at a higher rate and with greater volatility — which may eventually impact the government’s ability to meet a certain expenditure cap, if any. , as well as generating primary earnings,” the economists wrote.

In the area of ​​education, the problem is smaller because the government historically spends more than what is required by the floor.

Another complexity is the need to reconcile the entire design with the so-called golden rule of the Budget, which prevents the issuance of debt to pay current expenses, such as salaries and social benefits.

As it is a constitutional rule, it cannot be changed by the supplementary bill either. Thus, the design will need to dialogue with the golden rule.

The government is also discussing which debt indicator will be used as a reference. There is a group that prefers the DLGG (general government net debt), which includes the federal government, states and municipalities. Unlike other better-known indicators (such as gross debt), the DLGG excludes state-owned debt and government bonds used by the Central Bank to make its interest rate policy.

This, however, is not considered a central issue, as the debt will not be a parameter to dictate the dynamics of expenses, but rather a reference to be taken into account by the government, according to a technician.

Formally, the government has until August 31 to submit the supplementary bill. The deadline was set by the Transition PEC. Haddad, however, was advised to bring forward the proposal to April, after the noise caused by the government’s pressure for an interest rate cut, which led to an arm wrestling with the Central Bank.

Afterwards, Haddad advanced that deadline even further, to March, in an attempt to issue a strong signal of commitment to fiscal rules.