Senate body projects deficit of 1% of GDP in 2024; goal of the new fiscal framework is to close the gap

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Independent Fiscal Institution assesses that uncertainty regarding revenues increases the risk of non-compliance with the target. New rule for the control of public accounts was approved by the Chamber this week. The Independent Fiscal Institution (IFI), a body linked to the Federal Senate, projects a primary deficit of 1% of the Gross Domestic Product (GDP) in 2024. The assessment appears in the Fiscal Monitoring Report for May, released this Thursday (25). The primary deficit occurs when tax expenditures exceed revenues, disregarding public debt interest. When the opposite happens, there is a surplus. GDP is the sum of all goods and services produced in the country. The IFI’s projection is above expectations forecast by the economic team of the Minister of Finance, Fernando Haddad, during the discussion of the new fiscal framework, a mechanism that will establish new rules for controlling public accounts. Approved this week by the Chamber of Deputies and sent to the Senate, the fiscal framework sets the goal of zeroing the deficit in 2024. Under the new rule, the primary result target will be considered “fulfilled” next year if it stays between a surplus of 0.25% and deficit of 0.25%. It is a model similar to the inflation target that already exists today — which works with a central value and a tolerance interval, for more or for less. Chamber approves basic text of the fiscal framework In the assessment of the IFI, however, the risk of non-compliance with the target stipulated by the framework is high. “This risk stems from the need to expand primary revenues to meet the targets set for the coming years”, says the report. “The complexity of the fiscal rule and the dependence on funding sources that have not yet been presented increase the risks of non-compliance with the proposed rules in the medium term.” The Minister of Finance has already estimated that it is necessary to increase government revenue by an amount between R$ 110 billion and R$ 150 billion to make the targets contained in the proposed fiscal framework feasible. ‘Complex’ rule The IFI considers that the model of the new fiscal framework is more flexible than the spending ceiling — the current rule for controlling public spending with expenditure growth is limited to the inflation of the previous year —, but “extremely complex”. The IFI report cites a study by the International Monetary Fund (IMF), according to which a good fiscal rule design needs to meet three criteria: ensuring the sustainability of the public debt; have incentives to improve rule compliance; and be flexible enough without sacrificing simplicity. Based on this concept, the IFI assesses that “the principle of simplicity was not met in this proposal for a new fiscal framework”. In general terms, the proposal for the fiscal framework approved by the Chamber provides for: tolerance intervals for primary result targets; 0.6% floor and 2.5% ceiling for the real growth of the Union’s primary expenditures; expenditure growth linked to revenue growth; floor for public investments; bonus for investments in cases of excess earnings.

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