Minimum wage may put pressure on the fiscal framework in the future – 05/14/2023 – Market

Campaign platform of President Luiz Inácio Lula da Silva (PT), the policy of valuing the minimum wage may put pressure on the sustainability of the fiscal framework designed by Minister Fernando Haddad (Finance) in the coming years.

It is possible that the minimum wage will advance at a faster pace than the general rule of expenditure, which has been pointed out by economists as an incongruity between policies.

The measure should cost BRL 82.4 billion between 2024 and 2026, according to government estimates. Next year alone, the calculation indicates an extra expense of R$ 18.1 billion, not yet contemplated in the LDO (Budget Guidelines Law) proposal.

In the following years, the impact will be even greater: BRL 25.2 billion in 2025 and BRL 39.1 billion in 2026.

Lula’s proposal rescues the formula already used in PT administrations: readjustment for inflation plus the variation of the GDP (Gross Domestic Product) of two years before.

The fiscal rule says that the expenditure limit grows by the equivalent of 70% of the real increase in revenues (which is directly linked to the pace of economic activity), respecting a ceiling of real increase of 2.5% per year.

In a scenario of GDP acceleration, as is desired by Lula, the mismatch between the correction of the national floor and the fiscal rule would become even more evident, given that the growth of wages and benefits would increasingly exceed the correction of the spending limit.

The Ministry of Finance was contacted for comment on the assessments, but did not respond at the time of publication of this text.

Former Secretary of the National Treasury Jeferson Bittencourt, an economist at ASA Investments, points out that two-thirds of INSS (National Social Security Institute) benefits are equivalent to one minimum wage. In addition, there are other items that are influenced, such as salary bonuses and unemployment insurance.

“More than 50% of all Budget expenditure is indexed to the minimum wage”, he says. “And the problem is, by rule of thumb, the real rise is going to be quite large in 2023.”

The bill sent by the government still needs to be voted by Congress, but, if the proposed mechanism prevails, the real gain of the floor next year tends to stay at 2.9% – the size of the GDP variation last year. The percentage exceeds the ceiling of 2.5% of correction of the expenditure limit above inflation.

When an expense grows faster than the expansion of the ceiling itself, other expenses need to compensate for this movement — that is, they have a proportionally smaller space in the Budget.

The dilemma is similar to what was seen under the spending ceiling, a fiscal rule approved by the Michel Temer (MDB) government and harshly criticized by PT members. The ceiling also limited the growth of expenses, but was more rigid in preventing any type of correction above inflation. As a result, and also with political pressures to increase spending, the rule proved unsustainable in a few years.

The difference now is that the framework proposed by Haddad guarantees greater room for maneuver in the Budget by appropriating the additional space created by the PEC (proposed amendment to the Constitution) approved in the transition of government and also allowing some progress above inflation.

When sending the proposal for LDO 2024, the government indicated a space of R$ 196.4 billion for discretionary expenses, which include current costs and public investments. In the following years, the forecast is similar, always exceeding R$ 190 billion.

For Bittencourt, however, the slack could get much narrower in the coming years not only because of the dynamics of correcting the minimum wage, but also the institution of a minimum for investments and the change in the levels of health and education. “It is possible that the government feels discomfort [com o nível de discricionárias] still in this term”, he says.

In the accounts of the former secretary, the new fiscal rule can guarantee an extra space of R$ 125 billion to R$ 165 billion next year, considering the floor (0.6%) and the maximum ceiling (2.5%) spending limit growth.

The new margin cannot be consumed freely by the government, since it must also accommodate the increase in mandatory spending.

Of this amount, R$ 71.3 billion will be consumed just by the correction of social security and assistance benefits by the INPC. The real gain in the minimum wage will demand another R$18.1 billion.

The president of UGT (General Union of Workers), Ricardo Patah, downplays concerns about the issue. “The rule [do salário mínimo] it is similar to that of the first Lula government, and it was successful. It will certainly be an income distribution policy, which will bring about an improvement in the economic environment, with increased consumption,” he said.

The discussion around the minimum wage rule is politically delicate, as it is one of Lula’s campaign promises. Congress, however, has been looking for ways to minimize the pressure on the expenditure limit and is discussing putting the suspension of the real increase in the minimum wage as one of the adjustment triggers, in case the fiscal target is not met for two years in a row, as revealed by the Sheet.

There is also the impact of the change in the constitutional minima of health and education. Until 2016, they corresponded to a proportion of revenue (15% of net current revenue for health and 18% of tax revenue for education).

As of 2017, under the spending ceiling, the floors began to be corrected only by inflation —which contributed to slowing down its pace of growth. With the new framework, they will go back to the previous rule, linked to recipes.

The new rule has not yet been incorporated into the LDO proposal estimates. Therefore, the minimum in health and education should grow by R$ 35 billion compared to 2023, according to Bittencourt. This will also eat up some of the extra space, flattening out discretionary expenses.

The effect of the correction of the constitutional minima was also the target of warning by economist Tiago Sbardelotto, from XP Investimentos. He calculates that the increase will be R$ 33.4 billion, second R$ 28.8 in health and R$ 4.54 billion in education.

The issue is already on the government’s radar. Haddad has already said that the government must re-discuss the norms that dictate the advance of mandatory expenses and budgetary constraints (expenses linked to a floor or a percentage of revenues).

The government may also come under pressure from the revenue side. The framework requires compliance with primary result targets, obtained from the difference between revenue and expenditure. The goal of Haddad’s team is to move from a deficit of 0.5% of GDP this year to a surplus of 1% of GDP in 2026. The market has doubts about the government’s ability to deliver on these targets.