Tax framework is approved by the Chamber – 05/23/2023 – Market

In an important victory for the government of Luiz Inácio Lula da Silva (PT), the plenary of the Chamber of Deputies approved the basic text of the new fiscal framework on Tuesday night (23) by 372 votes to 108.

The expressive score shows a wide gap in relation to the minimum of 257 votes that the government needed to gather for the approval of a complementary bill. Last week, the urgency vote had already gathered 367 votes.

The new fiscal framework will replace the current spending ceiling, a rule that limits spending growth to inflation and is still in effect, although it has been circumvented in recent years. For the replacement to be effective, however, the text still depends on a vote on highlights (changes in the text) in the Chamber and needs to pass through the Federal Senate.

The approval of the basic text of the project occurred after changes in its content, but it still represents a relevant achievement for the PT government, which suffered a recent defeat when trying to change the Sanitation Framework and faces difficulties in consolidating a base of support in the National Congress .

The advancement of the proposal is also a victory for Minister Fernando Haddad (Finance), who had to face resistance within the PT itself to the design of the rule, which combines primary result targets with a spending growth limit.

One wing of the party defended a more lenient fiscal rule, anchored only on the primary target, but Haddad prevailed his team’s understanding of the need to maintain a ceiling for expenses, albeit more flexible —with room for real increases in expenses , above inflation. Even during discussions in Congress, the acronym continued to criticize the text.

Now, this model is endorsed by the Chamber of Deputies, with favorable votes from the PT itself and also from center acronyms such as PP, MDB and PSD. Two subtitles from the allied base, PSOL and Rede, oriented against the text. Already the PL of former president Jair Bolsonaro released the bench.

According to the rule proposed by the government, the 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 interval of 0.6% to 2.5%. In practice, these are the floor and ceiling for advancing expenses, regardless of the country’s economic situation.

In addition, the government needs to seek a primary result target, which is obtained from the difference between revenues and expenditures. The government says it is seeking a deficit of 0.5% of GDP (Gross Domestic Product) this year and intends to reach a surplus of 1% of GDP in 2026.

If the target is not met, the proportion of increased expenses in relation to revenue drops to 50%, until the trajectory of results within expectations is resumed.

The general lines of the proposal were maintained by the Chamber, but adjustments to the text continued until a few hours before the vote.

The rapporteur, deputy Cláudio Cajado (PP-BA), had last week included a device that fixed the growth of expenses in 2024 at a ceiling of 2.5%, which was seen by market economists as a maneuver to spend more. This and another change (focused on the inflation used to correct the limit) would, together, result in an extra space of up to R$82 billion.

The number was contested by Haddad and Cajado, but the noise generated led the rapporteur to adjust the text.

“We are going to make a mix between what was in the original text and a possibility. The original text predicted growth of 1.12% by the calculations that the government itself provided”, said Cajado after meeting with leaders to seal the agreement.

“[O governo] It will be able to use, rather than grow, between 2023 and 2024, up to 70% within the limit of 2.5%. It was a compromise to clear up that misunderstanding that the report was putting BRL 80 billion, BRL 42 billion [de gasto extra]”, he stated.

Cajado’s opinion predicts that the 2024 LOA (Annual Budget Law) will be drawn up 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 expected real revenue growth 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.

In practice, the new version allows the extra collection in 2024 to make room for more spending next year.

The additional expense may also be incorporated into the calculation base for 2025 and subsequent years, with one exception: if at the end of 2024 the expected gain in collection is frustrated —making the expenditure limit grow by more than 70% of the increase in collection—, surplus credits will be discounted.

The change represented a concession to Haddad’s team, which since the initial presentation of the framework maintained an expectation of an actual increase in spending close to the ceiling of 2.5% next year. During the negotiations, Cajado withdrew some extraordinary revenues from the calculation basis of the rule, which would compromise this projection. The government’s request was for a more generous expansion of spending in the first year of the rule.

However, this specific article was highlighted and still needs to be validated by the plenary in a separate vote.

The centrist parties, on the other hand, worked to tighten the rule, which in the original design did not contain punishments in case the government failed to meet the primary result target.

The rapporteur, Deputy Cláudio Cajado (PP-BA), included in his opinion a series of automatic triggers to adjust expenses in case of overflow of the primary target. 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.

In the first year of non-compliance with the target, the government will not be able to create new positions, expand aid, benefits, create new mandatory expenses and grant new tax incentives.

The adoption of a measure that implies an increase in mandatory expenditure above inflation will also be prohibited – except in the case of the minimum wage, which may follow the valuation policy, which provides for a real increase in GDP from two years earlier.

If the goal is still not met for the second year in a row, other adjustment measures come into play, which prohibit the granting of salary increases to civil servants and the holding of public tenders.

This device, however, is also pending a vote, due to a prominence presented by parties of the governing base: PSOL and Rede.

In another adjustment to make the framework more rigid, the text obliges the government to limit expenditures, in case there is revenue frustration or an increase in other expenditures that threatens the fulfillment of the fiscal target for 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 text also 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.

A reason for controversy in recent days, the inclusion of expenses with Fundeb (Fund for the Maintenance and Development of Basic Education and the Valorization of Education Professionals) under the scope of the framework limit has already been validated by the deputies.

Government supporters defended the exclusion of Fundeb from the limit on the grounds that education is an investment. The Secretary of the National Treasury himself, Rogério Ceron, said that the decision to include these transfers under the framework could represent a restriction of fiscal space in the medium term.

However, no highlight in this regard was presented in plenary. This means that the text is already validated by the plenary of the Chamber.

The fiscal framework does not change the rules for the supplement paid by the Union to Fundeb. This means that the percentage will continue to rise to 23% of the fund’s total resources until 2026, as approved in constitutional amendment 108/2020, and will remain at this level thereafter.

Cajado restricted the list proposed by the government of expenses that will fall outside the new spending limit to be followed by the Executive. In addition to Fundeb, expenses with contributions to non-dependent state companies (which use their own revenues to pay for operating expenses) and transfers to states and municipalities to pay for the nursing floor will be under the new expenditure ceiling.

In practice, this means that these policies will compete for space in the Budget with other programs, and their eventual faster growth may require cuts in other areas —which works as an incentive for the government to keep them under control.

There is a highlight, however, to try to exclude from the limit transfers to the FCDF (Constitutional Fund of the Federal District), supplied by the Union with resources from taxes paid by the entire population. The fund’s money finances DF spending on public security and other policies, on the grounds that the district government must take care of the space occupied by the federal administration.

This point faces resistance from congressmen from the Federal District and also from the bench linked to the area of ​​public security.

According to Cajado’s opinion, the DF fund would even have its correction rule modified, if Cajado’s opinion is approved. Today, the value is corrected by the annual variation of the RCL (net current revenue), that is, the more the Union collects, the greater the transfers to the Federal District.

Under this rule, the amount grew from BRL 18.2 billion in 2011 to a forecast of BRL 23.6 billion this year —in figures already updated by inflation. The rapporteur’s proposal is that the growth of transfers to the FCDF follow the percentage of correction of the general spending limit (0.6% to 2.5% per year).