Rapporteur of the fiscal framework opens loopholes for spending above the ceiling

In his opinion on the proposal for a new fiscal framework, deputy Claudio Cajado (PP-BA) introduced changes that, if approved, will allow the government to raise public spending in 2024 above the parameters established by the Ministry of Finance itself in the original project. The text was approved this Wednesday (17) as an urgent procedure for processing and should be voted on next week.

According to the original proposal sent by the government to Congress, expenses could grow annually up to the equivalent of 70% of the increase in revenues, however respecting the maximum limit of 2.5% of real increase. In the event of low growth or a drop in revenue, there would be a floor of 0.6% growth in expenses above inflation.

The substitute for Cajado, however, made an exception for next year, setting the increase in expenses at the ceiling, that is, at 2.5%, regardless of the evolution in revenue. As the premise of the new framework is to stipulate the annual limit on expenses over the previous year, this device alone can already have the effect of expanding the calculation base for all subsequent years.

But the report also brought other changes that give rise to additional spending by the government of Luiz Inácio Lula da Silva (PT). The rapporteur’s proposal created, for example, the possibility that payments and financial movements exceed the expenditure limit when the revenue and expenditure estimates during the year indicate that the primary result target will not be compromised.

Considering the tolerance band of up to 0.25 percentage points of GDP in the primary result target, this means that if the collection throughout the year is higher than projected, the government may spend more up to the limit of 0.25 pp of GDP above the target.

“The novelty ends up weakening the expenditure limit, which can be increased every year by up to 0.25 pp of GDP. In times of economic expansion, this also generates a pro-cyclical effect of the rule”, says Tiago Sbardelotto, economist at XP Investimentos.

The target for 2024 is a neutral primary result. According to the Bill of Budget Guidelines (PLDO) for next year, sent by the government to Congress in April, this means that the government would be meeting the fiscal objective even if it has a deficit of up to R$ 28.8 billion.

In another modification to the original proposal, expenses with the Basic Education Development Maintenance Fund (Fundeb) were removed from the list of exceptions to the new rule. The rapporteur, however, created a device that establishes that the growth of the amounts destined to the fund will be added to the spending limit.

That is, when the Federal Government’s complements to Fundeb increase, the annual spending ceiling will follow the growth to the same extent, which results, in practice, in the same effect of withdrawing the expenditure from the ceiling.

The rapporteur’s proposal also changed the reference base for calculating inflation on which the spending growth cap is based. For the projection of the rules for the following year, instead of considering the inflation from January to December of the current year, as in the original project, the substitute started to take into account the period between July of the previous year and June of the current year.

As the Annual Budget Bill (PLOA) is discussed in the second half of the year prior to execution, the objective was to eliminate the risk of divergence between the projected IPCA and the one carried out by the end of the year.

According to the substitute, the difference between the IPCA at the end of the year and the one used in the PLOA, if positive, can be used to supplement expenses in subsequent years. If the scenario occurs in 2024, the positive balance may be incorporated into the calculation base for 2025.

“Since it is very likely that inflation at the end of this year will be above the accumulated figure for the 12 months through June (our projections point to 3.9% for the 12 months through June and 6.2% at the end of the year), the effect of this will be a more inflated expense base for 2025”, says Sbardelotto.

Rapporteur created “triggers” to contain expenses, but president remains free of punishment

The substitute for the rapporteur was presented on Monday night (15) after a meeting between party leaders of the Chamber of Deputies held at the official residence of the President of the House, Arthur Lira (PP-AL) and which was also attended by the Minister of Finance, Fernando Haddad.

In his version, Cajado kept the President of the Republic free from the imputation of a crime of responsibility in case of non-compliance with the fiscal target, unlike what happens today with the spending cap rule.

However, in the face of criticism that the original project would be too “lax” in relation to the need to comply with the goals, the rapporteur introduced triggers for adjusting expenses, such as the prohibition of new public tenders, readjustments of civil servants and the creation or expansion of aid or tax benefits.

On Wednesday, with the presence of 470 deputies, the project had an urgent regime approved by 367 votes in favor and 102 against, in addition to one abstention. The measure was supported by PT, PC do B, PV, União Brasil, PP, PSDB, Cidadania, MDB, PSD, Republicans, Podemos and PSC. They directed against the Novo and PL parties and the PSOL/Rede federation.

For Nicolas Borsoi, chief economist at Nova Futura Investimentos, the substitute presented by Cajado brought positive and negative changes. “On the one hand, it added adjustment mechanisms, in case of non-compliance with the target, and resumed the contingencies, which will be triggered by bimonthly reports, in addition to excluding capitalization of state-owned companies and the nursing floor from expenses exempt from the ceiling”, he pondered, in a report for investors.

“On the other hand, 2024 expenditures will be increased by 2.5%, regardless of revenue growth, in addition to allowing spending to be up to 0.25% of GDP above the limit, if revenue and expenditure projections show that the goal will not be compromised”, he added.

The alterations that allow for an increase in expenses next year were also highlighted by Bradesco analysts. “In general, the changes presented brought some reinforcement for compliance with the rules, but with some flexibility for the growth of expenses in the short term”, says the bank’s document. “A point of attention was the setting of the percentage of 2.5% for the real growth of expenditure in 2024, the upper limit of the expenditure rule.”