New rule is difficult to comply with, says Henrique Meirelles – 04/20/2023 – Market

More flexible, but harder to enforce. This is how Henrique Meirelles defines the new fiscal rule sent to Congress by the economic team of the Minister of Finance, Fernando Haddad.

Former president of the Central Bank in two terms of Luiz Inácio Lula da Silva (PT) and former finance minister of Michel Temer (MDB), whose administration created the spending ceiling, Meirelles considers it a challenge to fulfill the pillar of the proposal: to make the adjustment with an increase in revenue, not with a cut in spending.

“The classic norms of fiscal adjustment in Brazil and internationally say that the government makes fiscal adjustments based on expenditure, without depending on revenue. The government controls expenditure, revenue does not,” he says, in an interview with Sheet.

“Doing the math, with what we have today, it doesn’t go where they say. An increase in revenue of R$ 150 billion is necessary. This supplementation with revenue is necessary. Is it possible? We’ll have to see”, he says.

What is your assessment of the new fiscal rule, now that the text has gone to Congress? The rule has many details about expenses that enter and do not enter, many rules, which is normal. Objectively, it is a positive rule in the sense of controlling expenditure. We must support the intention to contain expenditure. But there’s no debating which is more flexible.

On what aspect? In comparison, the ceiling rule is simpler, more direct and tougher. Spending simply follows inflation, period. There is no minimum, it does not depend on flexible factors. Spending cannot go beyond a certain point.

This rule proposes an expenditure increase of 0.6% to 2.5% above inflation, that is, it is more than inflation. The ceiling had no floor. This rule does.

And it is not enough to reach the primary goals that were announced by the minister [Fernando Haddad].

Why? Doing the math, with what you have today, it doesn’t reach where they say. A revenue increase of R$ 150 billion is required. This supplementation with prescription is necessary. Is it possible? We’ll have to see.

Mr. do you find it difficult? The classic norms of fiscal adjustment in Brazil and internationally say that the government makes fiscal adjustments based on expenditure, without depending on revenue. Expenditure, the government controls, revenue, no. Revenue depends on economic growth and a host of other unpredictable factors.

He [Haddad] started talking about some measures, such as the end of purchases between individuals, on the internet, below US$ 50. The measure was, then it stayed at “cancel, do not cancel” and even had a reaction in the president’s popularity.

Now you are talking about reducing tax benefits. It is good. In theory, it is better to reduce the tax benefit than to increase taxes. The problem is that, in order to reduce the benefit, you need to assess issues such as the competitiveness of the affected industry, because local taxation is very high compared to many countries.

So, the moment you start to reduce benefits, in practice, taxes increase, and this can affect the competitiveness of several Brazilian industrial sectors. This all shows how difficult it is for you to depend on increased revenue.

But Mr. did not say consider feasible.In theory, everything is doable, but you need to look at the costs. What, after all, will be the consequence.

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Henrique Meirelles, 77

Graduated in civil engineering from USP, with an MBA in Business Administration from UFRJ and Advanced Management Program at Harvard Business School, in addition to an honorary doctorate from Bryant College. He served at BankBoston for 28 years, where he rose to global presidency in the US; elected federal deputy for Goiás in 2002; President of the Central Bank of Brazil (2003-2011); president of the Olympic Public Authority (2011-2015); Minister of Finance (2016-2018) and Secretary of Finance and Planning of São Paulo (2019-2022).