Lula and Haddad’s ceiling tries to please Greeks and Trojans – 01/04/2023 – Vinicius Torres Freire

Luiz Inácio Lula da Silva is “great/good” for 38%, says Datafolha. Given the circumstances, it’s a favorable outcome.

Lula has also just released a preview of his spending ceiling, the “fiscal framework”. It still has holes, it is necessary to charge more taxes for the thing to work, and the spending restriction is loose. But the Lula-Haddad plan takes the prospect of disaster out of the way.

Even if it is not by far the best plan, it can work the magic of satisfying, at the same time, the Central Bank, big money dealers, government creditors, Congress, PT, etc. It will be mediocre satisfaction, if it works. But it’s something.

Next week, the government should present the revision of investment laws in water and sewage, known in the jargon as “sanitation landmark”. PT and company hate the “marco”, which is also a moderate privatization plan.

It was feared that Lula 3 would dynamit this “landmark”, which will facilitate more investment in the sector, even though it does have blind spots (lack of guarantees for the poor and the outback). At least by rumor, there may even be improvements in legislation, although PTism tries to find a way to extend the life of state-owned companies that, in general, do not work.

What does it mean, in short? That Lula can turn the economic game around, which got complicated after several goals against the president.

More urgently, it is necessary to fix and cement Fernando Haddad’s “fiscal framework”. Even tidy, it will not be the “best possible” (which, in turn, is far from “necessary”).
A good fiscal plan would give a firmer perspective that the spending and debt situation will be adequate in the next half decade, at the very least. With that perspective, interest rates would fall faster and faster.

The roof of Lula 3 is not like that. But it might work.

The plan is not like that because it authorizes a large pace of increase in real spending and puts the beginning of the fall in the public debt in an uncertain future; because the surplus depends on the good will of the government.
Furthermore, in order to work, the plan still depends on an increase in revenue well beyond the “normal” increase in revenue. By “normal” here is meant income that grows at the pace of GDP growth.

Even with this “normal” increase in revenue, Lula and Haddad will need to arrange at least R$ 150 billion in extra taxes (an increase of 8% in revenue).

As the plan provides for increased spending (and therefore amendments) as long as there is revenue, it becomes less difficult to get Congress to raise taxes, despite lobbying by the rich and rascals. A wrong tax increase can even be recessive, however.

It is true that the government can count on some luck. In practice, revenue increases more than GDP in years of economic growth and shrinks more than the economy in bad years, recession.
An important risk of the plan is what will be done with the extraordinary increase in revenue. That is, that money that comes in at the time of the fat cows and then disappears.

If the expense increases at the same pace as this temporary income, it becomes difficult to pay the bills when the bonanza ends (or the chance of reducing debt is wasted). Not infrequently, it sucks.

The Lula-Haddad plan has an increase in spending (in theory, 2.5% per year), which limits the spree with extraordinary revenues. See if that’s the case.

There are problems outside the “framework”. Linkages to health and education spending will make these expenses grow relatively more (they may take the place of investment, science, security, etc.). It would be good to tinker with it.

Another risk is the government throwing revenue away. Lula wants to charge less income tax from individuals. State companies want to pay less dividends. So, it won’t.

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