Lula government accumulates a series of creative accounting attempts

About to complete its first year, the current administration of Luiz Inácio Lula da Silva (PT) has collected a series of attempts and loopholes for so-called creative accounting – that is, the use of accounting maneuvers to disguise the fiscal situation or circumvent restrictions on the Budget, making room for more expenses.

Practices like these were frequent in previous PT administrations, especially in the government of former president Dilma Rousseff, who ended up losing her position in a process related to the so-called “fiscal pedals”.

The most recent maneuver was a provision in the Budgetary Guidelines Law (LDO) that limits the amount that could be contingency in 2024 to R$23 billion. Consultants from the Chamber of Deputies had calculated the total that would need to be allocated at R$56.5 billion. blocked until March, which would directly affect public investments and the payment of parliamentary amendments.

Contingency is a mechanism used to adapt the projected primary result to the established fiscal goals, in accordance with the Fiscal Responsibility Law (LRF).

To get around the requirement, the LDO project – already approved – began to shield several types of expenses from contingency, including all those that are excluded from the spending limit in the new fiscal framework. The device was included by the project’s rapporteur, federal deputy Danilo Forte (União-CE), but meets a demand from the government’s economic team.

Before the solution found by the rapporteur, Senator Randolfe Rodrigues (no party-AP), leader of the government in Congress, had presented an amendment that, roughly speaking, prohibited the blocking of expenses that prevented real growth in primary expenditure by 0.6%, as per established by the new fiscal framework. The suggestion, however, was considered legally insecure, as it confused basic concepts of the Budget.

“We will not accept creative accounting”, Forte stated at the end of November, in an interview with CNN Brazilwithout directly citing the so-called “Randolfe amendment”.

Government wants to exclude resources for New PAC from the primary result

Still in the 2024 LDO project, the government proposed, in August, to exclude from the calculation of the primary deficit up to R$5 billion in state-owned companies’ expenses with the New Growth Acceleration Program (PAC). The device, initially rejected by the rapporteur, ended up being approved in the approved version of the text by the Mixed Budget Committee (CMO), after agreement.

The target set out in the budget for state-owned companies is a deficit of R$7.3 billion. With the measure proposed by Planalto, companies can spend up to R$12.3 billion without missing the target, which, in practice, increases their investment capacity.

Another idea from the Executive classified by economists as an attempt at creative accounting was the request to the Federal Supreme Court (STF), at the end of September, to pay the accumulated court orders postponed during the administration of Jair Bolsonaro (PL).

This is because the proposal sent to the Court spoke of separating debts into two parts: the principal amount would continue to be classified as a primary expense, while interest and monetary corrections would be treated as financial expenses, with no impact on the primary result.

“I think it is commendable for the government to try to resolve and pay the postponed court orders. This is positive”, said Manoel Pires, coordinator of the Fiscal Policy Observatory at the Brazilian Institute of Economics of the Getulio Vargas Foundation (Ibre/FGV) to “Folha de S.Paulo”, at the time. “But I have difficulty understanding the precatório interest as a financial expense because it arises from a primary expense. There is no credit operation in this”, he added.

For Marcos Mendes, associate researcher at Insper and specialist in public accounts, there is no legal principle or accounting practices that justifies the measure. “If it receives legal approval, it could have an effect on primary interest expenses far beyond court-ordered expenses,” he declared, to the same publication.

“And worse, the argument that late payment of court orders is a debt and, therefore, a financial expense, becomes an incentive for people to delay payment of court orders in the future, just to pay them as a financial expense”, he added.

At the end of the analysis of the case, by nine to one, the STF authorized the government to pay the outstanding court orders still in 2023, estimated at R$95 billion, through extraordinary credit, but without accounting reclassification of the expense. The expense will not be counted for the purposes of complying with the tax rule.

Amounts that would also be postponed until 2026, according to the constitutional amendment enacted in 2021, may also be settled using the same method.

Financial fund to support students opens the door for creative accounting

Even the financial incentive for students to remain in high school proposed by the government leaves room for creative accounting. The provisional measure issued at the end of November to establish the program’s guidelines provides for the Union’s participation in the fund that will finance the program with up to R$20 billion in resources in the form of shares from state-owned companies or direct contributions.

It also says that from 2024, oil and natural gas auctions may provide for the winner to make contributions to the same fund. Both the use of shares and the investments required from private companies would bypass the primary result calculation.

The president of the Chamber of Deputies, Arthur Lira (PP-AL), however, decided to let the text lapse and, on Tuesday (12), put a bill to a vote, authored by deputy Tábata Amaral (PSB- SP), which also institutes financial incentives for high school students. The proposal, filed in 2021, was approved in a symbolic vote and now goes to the Senate.

The text was approved in the form of a substitute by rapporteur Pedro Uczai (PT-SC), who left the way in which the fund’s shares will be paid up by the Union for later regulation.

Accounting distortions began during the transition

The first accounting distortion emerged even before the start of the current government, in the proposed Constitutional Amendment 32/2022, called PEC fura-ceto or PEC da Transição, approved and promulgated in December 2022.

A provision in the text provides for the transfer of resources from abandoned PIS/Pasep accounts to the Treasury, classifying them as primary revenue. The problem is that, according to the Central Bank’s Fiscal Statistics Manual, the operation should be treated as an equity adjustment, which would reduce public debt, but without affecting revenue.

In September, R$25.98 billion was appropriated by the Union and forgotten by program shareholders. In the Primary Revenue and Expense Assessment Report (RARDP) for the fifth two months, the government’s economic team recognizes the atypical treatment of incoming resources.

As the authors of the document report, the difference in interpretation generated a “statistical discrepancy” between the primary result measured by the Central Bank that month and that presented in the report:

“This difference occurs due to the inclusion, by the National Treasury, as primary revenue, of unclaimed balances for a period exceeding 20 years in PIS-PASEP accounts, […] while the methodology for compiling macroeconomic statistics of the fiscal sector adopted by the Central Bank excludes the value of the PIS-PASEP entry from the Public Sector Financing Need – NFSP, since, according to that body, this value falls within the definition of adjustment patrimonial and does not represent a fiscal effort in the period”, says the government text.

Lula vetoed the tax closure device that prevented creative accounting

Successor to the spending cap rule, the so-called new fiscal framework, presented by the government in March, established a series of expenses that will not be reached by the annual spending limit. In an attempt to prevent the use of creative accounting, parliamentarians included an article in the text that prevented the exclusion of primary expenses from the calculation of the primary result target in the Budget Guidelines Law (LDO).

Approved by the majority of the 513 deputies and 81 senators of the National Congress, the device ended up vetoed by Lula in the sanction of the proposal, converted on August 31 into Complementary Law 200/2023.

In a message to the president of the Senate and Congress, Rodrigo Pacheco (PSD-MG), the president stated that the legislative proposal goes against the public interest, since the LDO would be the “competent diploma” to establish and manage fiscal result targets and which, therefore, must contain the express authorization of exceptional measures such as the exclusion of expenses from the target calculation.

Lula and, subsequently, the Ministers of Finance, Fernando Haddad, and Planning and Budget, Simone Tebet, argued that the article would prevent operations to match court-ordered accounts, which were used in the 2023 Budget, highlighting that this type of transaction can be advantageous for the taxpayer and for the Union.

“The so-called creative accounting has left many problems with public accounts and the economy, in a recent period, and this device would act as a kind of vaccine against new attempts”, commented economist Felipe Salto, from Warren Rena, at the time. “By withdrawing it, the government sends a bad signal in this regard.”

On the 14th, however, in a defeat for the Lula government, Congress overturned the presidential veto on the device.