Tax framework can save BRL 64 billion/year, say analysts – 04/04/2023 – Market

The new fiscal rule, presented by the government of President Luiz Inácio Lula da Silva (PT) last week, would have generated savings of BRL 775.3 billion or BRL 64.6 billion a year, at constant prices for 2022.

The estimate is from Warren Rena chief economist Felipe Salto and analyst Josué Pellegrini. For the calculation, they considered the effects that the new fiscal framework would have had on the evolution of expenses and the primary result of the central government in the period from 2011 to 2022.

In a note released to investment advisory clients this Monday (3), they note that in the period from 2011 to 2022, expenses grew at an annual average of 2.5% in real terms. Revenue grew at an annual average of 1.4%.

They also point out that the new rule proposed last week by the Minister of Finance, Fernando Haddad, predicts that primary expenditure should grow at a rate of 70% of the real growth rate of past net revenue, but fluctuating between 0.6% and 2. 5% in real terms.

In their simulation, for the period from 2011 to 2022, the rate of change in spending was replaced by one calculated based on the rule of 70% of real growth in primary net revenue.

They also considered the real change in accumulated net revenue up to June of the previous year to obtain the expenditure limit. When expenditure exceeded 2.5% or fell below 0.6%, as foreseen in Haddad’s rule, these limits were applied.

“The result is that the average annual real growth rate of expenses would have been 40% lower than the actual observed picture.”

In current values, they reached an accumulated savings in the period of R$ 592.5 billion or R$ 49.4 billion per year. At 2022 prices, BRL 775.3 billion or BRL 64.6 billion per year.

One criticism that has been leveled at the new set of rules that will replace the spending cap is that it depends on increasing the tax burden, analysts say.

“In fact, the spending rule determines, by construction, that spending will always grow at a rate 30% lower than the rate of change in net income. Also a goal of [resultado] ambitious primary school will need to be fulfilled and, here, it is up to the discussion of how to achieve it in the first two years, mainly.”

Salto considers that to eliminate the primary deficit next year, an additional fiscal effort of around R$ 105 billion in 2024 would be necessary.

“Minister Fernando Haddad made a prior announcement that he will establish taxation on electronic games, with an estimate of R$ 12 billion annually”, continues the note.

In the government, measures are also being discussed in the field of tax expenditures, an objective that comes up against the difficulty of modifying old benefits, say analysts.

Understand in 5 points

RULE 1. Expenses will have limited growth

The framework establishes that expenditures need to grow at a slower pace than revenues. The proposed percentage is 70%. For example, if revenues grow by 1%, federal spending can only grow by 0.7%.

To calculate how much it will be able to spend in the following year, the government will use net primary revenues in the 12 months up to June of the current year. (primary revenue is non-financial revenue, such as, for example, tax collection, royalties and transfers received from other public entities; net primary revenue is total primary revenue minus mandatory transfers to other entities).

RULE 2. Expenditure growth will have a ceiling and a floor

The real growth (discounting inflation) of expenses, according to the government’s proposal, cannot be less than 0.6% nor greater than 2.5%.

For example, if revenues rise 4%, when applying rule 1 the allowable increase for expenses would be 2.8% (70% of 4%), but rule 2 bars this increase by the ceiling of 2.5%. This imposes a limit on expenses in good times and increases the possibility of reducing the public debt, since there are more resources left.

On the other hand, also in an example, if revenues do not rise at all in the 12 months of reference, rule 1 ceases to apply and an increase in expenses of 0.6% will be allowed. This allows expenses not to be strangled in years of crisis

RULE 3. Expenditure on education, health and amendments are an exception

rule 1 does not apply to health and education expenses, since these expenses have minimum spending rules already established by the Constitution. In these areas, expenses may grow at the same pace as revenues. The same goes for parliamentary amendments.

RULE 4. If savings are not enough, spending will be tighter

In its proposal for a fiscal framework, the government establishes a commitment to reduce the current fiscal deficit (a fiscal deficit occurs when expenditures exceed revenues), zeroing this deficit in 2024 and obtaining a surplus (surplus revenues, since they exceed expenditures) growing in the next years.

This commitment proposes an upward and downward margin (band) in the annual result of public accounts. For example, for 2025, the government is committed to obtaining a surplus of 0.5% of GDP, ranging from 0.25% to 0.75% (the bands are 0.25 percentage points for less and for more).

If the savings obtained are below the lower band, rule 1 will be stricter: instead of expenses growing 70% of the increase in revenues, can only increase 50%.

RULE 5. Investments will have a floor and can grow if the economy is greater than expected

The proposal creates an investment floor of around R$75 billion in today’s values, corrected for each year’s inflation. If the saving of public resources is above the proposed band (understand what this band is in rule 4), the government can use this surplus of resources to make more investments in works.

This would happen, for example, if the government obtained a surplus of 3% of GDP in 2024, while its commitment for next year is to zero the deficit. Since 3% is above the upper band of 2.5%, he is licensed to invest the surplus.