New fiscal framework: understand what it means in practice for the economy

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The proposal will be presented to President Lula and then made public and forwarded to the National Congress. New fiscal rule will replace spending cap. Minister of Finance presented a proposal for a new Fiscal Anchor to Vice President Geraldo Alckmin The Minister of Finance, Fernando Haddad, should present this week to President Luiz Inácio Lula da Silva (PT) the proposal for a new fiscal framework. The measure will replace the spending ceiling – a rule that limits the growth of a large part of the Union’s expenses to inflation. The expectation is that, after the president’s endorsement, the minister makes the proposal public and forwards the bill to the National Congress. ❓ But, after all, why does the government need to present a new tax framework? 💸 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 present, via a complementary bill, by August 31 of this year, a new fiscal rule to replace the spending cap . 🔍 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 tax rule was negotiated during the government transition period, at the end of 2022. 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. That is why, 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 Daniel Sousa: Fiscal framework was destroyed during Paulo Guedes’ administration Why Will the new tax rule matter? Although we still do not know what the design of the new fiscal rule will be, 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 indebtedness public. “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 will have to: become more indebted to fulfill campaign promises or count on an increase in 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 fiscal framework, if well designed, should be on the expectations of economic agents, experts say. That is, the country will have more credibility. “The government succeeding in creating civil fiscal rules 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. Economist Sergio Vale, however, clarified that the reduction in Selic will not be immediate, as it is still necessary to know the design of the rule and know how it will be approved by the National Congress, which can still change the text. What is the effect of the framework in the long run? ▶️ In the medium and long term, if the framework is approved, 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 can result in more credit and greater economic growth”, explained 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]”, summarized. What should the new fiscal framework look like? Vilma Pinto explained that, in general, countries propose a fiscal rule based on controlling expenses, as was the case with the expenditure ceiling, or one that conditions the growth of expenses to the public debt or the primary result (collection minus expenses) of government accounts. There can also be a mix of these concepts. 📑 For the economist, the new rule that will be proposed by the government has to be simple to be applied in fact. In addition to having certain flexibility to accommodate any extraordinary expenses arising from external events, such as a pandemic. 📑 Sergio Vale already defended that the new rule includes the control of public spending: “The big fiscal problem in Brazil was an excessive growth in spending. So, you need to have some restriction on spending, but also have to be flexible so that, in times of recession, you can spend more. And if you’re in a good mood, spend less and save”. 📑 Bianca Xavier also agreed that the rule needs to provide for cost containment. “From the point of view of fiscal responsibility, it is always recommended that there be this limitation, a containment. If not, it could lead to an imbalance in public accounts.” Fiscal framework focused on Brasília

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