Senate approves basic text of the fiscal framework with 57 votes in victory for Lula and Haddad – 06/21/2023 – Market

The government of Luiz Inácio Lula da Silva (PT) advanced one more step in approving the new fiscal framework, consolidating the political victory first obtained in the Chamber of Deputies. The basic text was approved this Wednesday (21) in the Senate plenary by 57 votes to 17.

The expressive score shows, once again, a wide gap in relation to the minimum of 41 votes that the government needed to gather in the Senate —a relevant feat for a government that faces difficulties in consolidating a base of support in the National Congress. The advantage had already occurred in the Chamber, when the fiscal rule received the support of 372 deputies (against a minimum quorum of 257).

Support for the proposal also carries symbolism as it occurs on the same day that the Central Bank announces its new decision on interest rates, keeping the Selic rate at 13.75% per annum. Different parliamentarians have reinforced the government’s chorus asking for BC relief via interest rate cuts, and the bet is that the advancement of the framework will reduce uncertainties and create a conducive environment for this.

The validation of the text occurred through flexibility. The rapporteur, Senator Omar Aziz (PSD-AM), expanded the list of expenses that will be outside the spending limit, including Fundeb (Basic Education Maintenance Fund), FCDF (Constitutional Fund of the Federal District) and expenses with science and technology. Because of the changes, the bill will need to go through the House again before moving on to presidential approval.

Of the three items excluded from the framework, two (Fundeb and FCDF) were already free of the limitation in the government’s original proposal. The Chamber had opted for a tightening of the rule, but the current configuration brings comfort to the team of Minister Fernando Haddad (Finance).

In the case of expenses with science and technology, the proposal came from an amendment by Senator Renan Calheiros (MDB-AL), and its approval contradicted the government by opening the door for other groups to ask for differentiated treatment. The expectation is that the device will be overthrown in the Chamber, commanded by Arthur Lira (PP-AL).

The Senate plenary still needs to appreciate the highlights (suggestions for changes in the text), but the final balance is in favor of Haddad. The minister became directly involved in political articulations and not only managed to maintain the backbone of the framework designed by the Treasury, but also overcame pessimistic forecasts that the vote in the Senate would have to be postponed to the coming weeks.

Lira promises to guide the framework in the Chamber in early July. If this is confirmed, the government will have one of its main economic agendas approved well before August 31, the original deadline for the government to take the initial step and send the proposal to Congress.

The economic team hopes that the advancement of the new fiscal rule will contribute to reducing financial market uncertainties regarding the future of public accounts, although there is still distrust regarding the implementation of the new rule, which is excessively dependent on new revenues.

To meet the fiscal targets, economists project that the Executive needs to arrange at least R$ 100 billion in extra revenue just for 2024.

After final approval, the new fiscal framework will replace the current spending ceiling, which allows spending to grow only due to inflation and is still in effect, although it has been circumvented in recent years.

The new framework combines primary result targets (obtained from the difference between revenues and expenditures) with a more flexible spending growth limit than the cap. The principles were defended by Haddad and his team despite resistance within the PT itself. One wing of the party wanted a more lenient fiscal rule, anchored only on the primary target, but it was voted against.

According to the approved rule, the real increase in the spending limit for the following year must be equivalent to 70% of the variation in revenue in the 12 months accumulated up to June of the previous year, already discounting inflation, provided that the range of 0.6% to 2 is respected. .5%. In practice, these are the floor and ceiling for advancing expenses, regardless of the country’s economic situation.

In addition, the government needs to meet a primary outcome target. The objective is to seek a deficit of 0.5% of GDP (Gross Domestic Product) this year and reach a surplus of 1% of GDP in 2026 —goals considered ambitious by market economists, who still view with caution the capacity of the Treasury to honor those commitments.

As a rule, if the target is not met, the proportion of increased expenses in relation to revenue drops to 50%, until the return of the trajectory of results within expectations.

While it preserved the central pillars of the rule, the Senate rejected calls from one wing of the government to change the inflation formula used to fix the spending cap.

The government originally proposed to update the new ceiling by the index from January to June of the previous year, plus the estimated variation between July and December of the same year. This rule marked out the parameters of the 2024 PLDO (Budget Guidelines Bill), sent in April.

During the vote in the House, the deputies preferred to remove the projection component to prevent overestimated inflation from being used to boost government spending. The correction started to be made by the index accumulated in 12 months up to June of the previous year.

As inflation until June should be lower than the variation until the end of the year, Minister Simone Tebet (Planning and Budget) has already warned that the measure should force the government to cut from R$ 32 billion to R$ 40 billion in expenses costs and investments in the budget proposal to be sent on August 31st.

The text of the framework allows for the difference to be compensated with the opening of new credits over the next year, but this would not solve the political problem of passing the scissors on the various government actions when presenting the Budget.

In a last minute articulation, the government managed to include a device that allows including expenses conditional on the approval of the credit by the Legislature —which avoids cutting expenses when sending the Budget, but would maintain the bargaining power of the parliamentarians.

To enshrine the negotiation, several government members went to the Senate plenary, including ministers Simone Tebet and Waldez Góes (Regional Development). There is, however, no guarantee that the section will be maintained by the Chamber.

On the other hand, the Senate maintained the device that authorizes the government to use the increase in revenue in 2024 to make room for more spending next year.

The proposal for the 2024 LOA (Annual Budget Law) will be prepared under the rule of 70% of the increase in revenues in 12 months until June 2023, but the government may make an adjustment next year, based on the expectation of real growth of revenues in 2024.

The text authorizes the government to calculate, in May 2024 (when the government publishes the second bimonthly evaluation of the Budget), an estimate of the real increase in revenue in relation to 2023 and to apply the proportion of 70%. If this results in a number greater than the one that corrected the spending limit, the economic team can open new credits in an equivalent amount.

The Senate also maintained the automatic triggers to adjust expenses in case the primary target is exceeded. Among the measures are the prohibition of public tenders and raises for servers.

The policy of valuing the minimum wage, however, will be shielded from these mechanisms, at Lula’s request.

The text also obliges the government to contingency expenses, in case there is frustration of revenues or increase in other expenses that threatens the fulfillment of the fiscal target in the year. This would be a prudential measure adopted by the manager to try to avoid exceeding the target.

Initially, the government wanted the adoption of this measure to be optional, in a flexibilization in relation to what the current version of the LRF (Fiscal Responsibility Law) mandates. Congress did not accept this proposal and reestablished the contingency, but stipulated a limit of 25% of the amount foreseen in the Budget for discretionary expenses —which include current costs and investments.

The proposal determines that the contingency needs to be proportional between the different headings. In practice, this prevents the squeeze from falling only on investments, as has occurred in the past.

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PROCESSING

What happens now, with the approval of the basic text by the Senate?

The Senate still needs to complete the vote on the highlights (suggestions for changes in the text).

After this step, and as there have already been changes, the project needs to return to the Chamber of Deputies, which has the final word on the project. The deputies can accept the senators’ changes or restore the text originally approved by the Chamber. After the new vote, the project is sent to the President of the Republic for sanction.

What does it take for the proposal to pass Congress?

Complementary bills require an absolute majority of favorable votes, that is, more than half of the members of each House. That means at least 257 votes in the House and 41 votes in the Senate.

Once approved by Congress, what happens to the proposal?

The Chief Executive has 15 working days to sanction the project in its entirety or with partial vetoes in some devices, or even veto it entirely. All vetoes undergo further validation by Congress, which can overturn them with an absolute majority of deputies (257) and senators (41).