New fiscal rule, even loose, does not support the government’s aspirations – 04/21/2023 – Marcos Mendes

The main objective of a fiscal rule like the one presented this week is to prevent the public debt from growing excessively. This is essential. There is no middle-income country that has become rich hanging on to an unsustainable public debt. The lives of the poorest will only improve if the country grows more and persistently, abandoning the chicken flights of recent decades.

This is not the diagnosis of most politicians and economists in the current government. They see little problem in a growing debt and believe that the country’s ills will be solved by new public programs.

The transition PEC (Constitutional Amendment 126/22) and other measures taken at the end of 2022 signaled the preference of the current government. Even before taking office, the elected government asked for and obtained authorization from Congress to increase spending, on a permanent basis, by R$ 210 billion. Specialists argued at the time that with R$70 billion it would be possible to organize public programs. But the new government insisted on getting much more space.

In order not to give carte blanche to the government, Congress, in the same PEC of the Transition, determined that a new fiscal rule be approved. Otherwise, the spending ceiling will remain valid, reversing the increase then granted. Therefore, the government has to approve the new fiscal framework not to spend less, but to continue spending more.

The consequence is that the proposal has the dubious character of allowing spending to grow between 0.6% and 2.5% above inflation, every year, and promising that it will obtain increased revenues to pay for the growing expense. With this, he tries to accommodate the pro-spending conviction of most members of the government with the demand made by Congress.

We enter 2023 with a record deficit of BRL 228 billion, almost all caused by the transition PEC and related measures. It’s not a damn inheritance. It was a conscious choice of the current government. With this bad starting point, it becomes more difficult to generate surpluses again and be able to control debt growth.

If expenditure grows close to the upper limit set by the fiscal rule (2.5% above inflation), it will advance more than GDP, which has rarely exceeded 2%. So it’s a lot of expense increase.

However, this limit becomes narrow when one realizes that, apart from the fiscal rule, the main policies announced by the government imply an increase in expenses: permanent rule of readjustment of the minimum wage, salary readjustment and hiring of civil servants, renegotiation of the population’s debts.

On the revenue side, the intention to collect more also collides with already announced policies: reduction of dividend payments from state-owned companies to the Treasury, suspension of concessions and privatizations, increased incentives and subsidies to industry.

The wish list does not fit the framework, however loose. It is the government in conflict with its own rule.

Additionally, the end of the spending cap will imply a return to linking minimum spending on health, education and parliamentary amendments to revenue growth. An inefficient model, which causes fluctuations in the available resources, leading to interruption of programs and waste. It will cause an increase in expenses already in 2023.

To comply with the rule, successive increases in government net revenue will be required, which, in 2027, would need to be 3 percentage points of GDP above the average observed in 2010-2022. There are more than R$ 300 billion in today’s values. This is not achieved by closing loopholes and revoking privileges. Taxes will have to be raised. Which will bring down our already meager growth.

If revenues do not come, the increases in spending desired by the government will imply cuts in important programs, such as financing for agriculture, penitentiary funds, school lunches, health surveillance, the environment, urbanization, disaster prevention.

The third possibility is to abandon the rule, not to raise taxes or limit expenses. Then inflation will rise, debt will spiral out of control, mediocrity growth will perpetuate itself, and the poor will pay the bill.

There is nothing new: choices will have to be made.

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