New fiscal framework: understand practical effects on the economy and next steps after approval by the Chamber

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Deputies must still vote on highlights, which may modify the proposal, this Wednesday (24); then, the text is sent to the Senate for analysis. New rules intend to improve public accounts and allow more investments by the government. Chamber approves basic text of the fiscal framework The basic text of the new fiscal framework was approved by the Chamber of Deputies, on Tuesday night (23). The measure should replace the spending ceiling – a rule that limits the growth of a large part of the Union’s expenses to inflation – and foresees an increase in expenses linked to the increase in public revenue. This Wednesday (25), the Chamber should finalize the proposal’s processing in the House, with the vote on four highlights that can change the text. It will then be sent to the Senate for consideration, where it can go through committees or go straight to a plenary vote. If approved by Congress, the new fiscal framework will go to President Lula for approval. The last step is publication in the “Official Union Gazette”. With that, the framework will officially become the fiscal anchor of the government. ❓ But, after all, why does the government need a new tax regime? 💸 And what is the importance of the new rule for the economy and, consequently, for the population? The Proposed Amendment to the Constitution (PEC) of the Transition, approved and sanctioned at the end of last year, determined that the government should present, via a complementary bill, a new fiscal rule to replace the spending ceiling. The deadline was August 31 of this year. 🔍 The objective, according to the amendment, is “to institute a sustainable fiscal regime to guarantee the country’s macroeconomic stability and create the appropriate conditions for socioeconomic growth”. This obligation to present a new fiscal rule was negotiated during the government transition period, at the end of 2022. What does the new fiscal framework propose? The fiscal framework limits government spending and sets rules for spending growth in coming years. The text foresees: that the growth of public expenditures is limited to 70% of the real growth of government revenue, if the target for the result of public accounts is met (example: if revenue rises by 2%, expenditure may increase by up to 1. 4%); that the growth of public spending is limited to 50% of the real growth in government revenue, if the target is not met (example: if revenue rises by 2%, expenditure may increase by up to 1%); that even if the government’s revenue grows a lot, it will be necessary to respect a fixed interval in the real growth of expenses, varying between 0.6% and 2.5%, disregarding the inflation of the period; The text also provides for triggers that require expenditure containment whenever government spending exceeds certain limits. See what they are: if revenues do not progress as projected, the government will be forced to contingency expenses; if, even with contingency expenses, the government fails to meet the fiscal targets (zeroing the deficit in 2024 and having a surplus in 2025 and 2026), gradual triggers to contain expenses will be triggered. Why replace the spending cap? The understanding of the Lula government is that the spending ceiling, the rule currently in force, did not allow the country to invest as it should have in recent years, bringing losses to several areas, such as infrastructure, housing, education and health. 🛑 In addition, the spending ceiling itself – created in 2016 and implemented from 2017 – fell into disrepute, after the exceptions that were created in recent years to dribble compliance with the rule. “The ceiling rule has been losing effectiveness and there is no longer any guarantee that it will be able to ensure fiscal sustainability”, said Vilma Pinto, director of the Independent Fiscal Institution (IFI) of the Federal Senate. Therefore, with the new rule, Lula’s economic team wants to create new fiscal parameters that will allow: stabilizing the public debt balancing the government’s accounts increasing investment in priority areas Why will the new fiscal rule be important? Specialists consulted by the g1 are unanimous in saying that the new framework is necessary for the government to be able to improve over time the result of its public accounts and also to stabilize the public debt. “The fiscal framework has a role in preventing the public accounts from being out of control, which means spending growing excessively and which can put pressure on inflation and the strong growth of public debt”, said Sergio Vale, chief economist at MB Associados. “A new fiscal framework signals a commitment to society that the government will conduct fiscal policy responsibly”, summarized Vilma, from the IFI. Otherwise, the Lula government would have to: become more indebted to fulfill campaign promises or rely on increased revenue, which may come from improving the economy (a remote hypothesis in the short term, according to specialists) or even increase the taxes that are charged of the population and companies What is the effect of the framework in the short term? ▶️ In the short term, the main effect of the new tax framework should be on the expectations of economic agents, experts say. With the proposal approved by the Chamber, the government hopes that the country will have more credibility. “The government succeeding in creating a credible fiscal rule has a short-term impact via confidence, reducing fiscal uncertainties and the fiscal risk itself. This will generate positive results from the point of view of confidence,” stated Vilma. ▶️ This improvement in expectations could be reflected in a reduction in the premium rate for future interest rates and also for Selic itself, the economy’s basic interest rate. The higher these rates, the more expensive it is for the government to indebt and also for people and companies, which inhibits economic growth. It also increases the country’s risk perception, that is, the idea that the country may end up not paying its public debt. The president of the Central Bank, Roberto Campos Neto, has already indicated that the new rule could help bring down the Selic rate, currently at 13.75%. However, he stated that it will not be immediate, and that there is no “mechanical relationship” between interest rates and the new framework. What is the effect of the framework in the long term? ▶️ In the medium and long term, if the new fiscal framework is approved and well received by economic agents, it could help with economic growth, credit availability and inflation control. “The fiscal framework, if it is well done and means a more consistent drop in interest rates in the future, this drop in interest rates could result in more credit and greater economic growth”, explained Sergio Vale, from MB Associados. ▶️ It will also allow the government to invest in social policies. “When we talk about a fiscal framework, it is the government’s attempt to make public policies, but with fiscal responsibility, that is, balancing what it earns with what it spends”, pointed out Bianca Xavier, a professor at FGV Direito Rio. “It’s like doing public policy without causing a deficit and high indebtedness [público]”, he summed up.

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