Tax framework: rapporteur confirms extra gastro in 2024 – 05/18/2023 – Market

The rapporteur for the fiscal framework, Deputy Cláudio Cajado (PP-BA), confirmed in an official note that the changes in his opinion may provide extra space for spending in 2024. However, he questions the financial market numbers and sees a smaller gain than estimated.

Economists project a break of up to R$ 82 billion in 2024 thanks to two changes: the setting of the real growth of the expenditure limit at 2.5% next year and the authorization to incorporate into the expenditure base an eventual acceleration of inflation until the end of 2023.

The calculation of BRL 82 billion was made by former Secretary of the National Treasury Jeferson Bittencourt, economist at ASA Investments. Other houses also pointed to a gain, albeit smaller. Tiago Sbardelotto, from XP Investimentos, calculates an additional BRL 68 billion.

The release of calculations on the size of the extra space for the government to spend generated noise. Both Cajado and Minister Fernando Haddad (Finance) came out in defense of the opinion, contesting the numbers.

In the note, Cajado says that the decision to set the limit growth at 2.5% for 2024 creates a space of “at most” R$ 12 billion.

The change introduced by the rapporteur in the inflation to be used in the accounts would have, as an initial consequence, a cut of around BRL 40 billion in the government spending limit in 2024. So that “there would be no such loss”, he authorized the government to keep this value by incorporating the acceleration of the price index expected until the end of the year into the numbers.

“In this case, the substitute is not adding any value to what was proposed by the government”, says the rapporteur.

The expansion is analyzed while economists interpret that the rule created by the government would result in expenses growing below the maximum of 2.5% allowed by the rule in 2024, the first year of validity of the framework.

Cajado says that the projections of the government and the Chamber differed. The Chamber consultancy estimated that spending growth would be 1.9% next year.

By establishing a higher real expenditure growth, of 2.5%, the rapporteur sought to converge with the government’s expectation, under the justification of offsetting the effect of the fuel exemption adopted in the second half of 2022, during the Bolsonaro administration. This was the component responsible for the smallest increase in revenue in the estimates —which, consequently, reduced the amounts for expenses.

“It is estimated that, due to the exemption, the real revenue growth will be 2.9%, when it could have reached 3.6%”, says the rapporteur’s note.

Economists outside the government had even more modest forecasts for the spending expansion next year. Bráulio Borges, specialist in public accounts, estimated that this growth would be 0.9%. Manoel Pires, from FGV Ibre, around 1%.

In the market’s evaluation, by asking that growth be set at 2.5%, the Executive was trying to guarantee extra space to spend what it would not be able to with the increase in revenue, as proposed in the rule. It also demonstrates that the government intends to postpone the adjustment and continue to increase expenses even after the approval of Congress to raise expenses by R$ 168 billion this year.

Fuel exemption also started to pull down the correction of the new ceiling due to another change, in the inflation indicator used to adjust the limit.

Haddad’s team sent the proposal for the new fiscal framework, providing for the correction of the expenditure limit by the inflation observed from January to June of the previous year and by the projected variation for prices from July to December of the same year.

This option repeats the maneuver used by former minister Paulo Guedes to expand the spending ceiling limit, a rule that will now be replaced by the new framework.

The assessment of technicians accompanying the negotiations is that allowing the use of projections to correct the limit from one year to the next would leave the possibility of choosing a higher estimate to boost its spending space in the hands of the government.

The rapporteur decided to change the mechanism and establish the correction of the limit only for the inflation already observed in the 12 months until June of the year prior to the ceiling being in effect —the last information available at the time of submission of the Budget proposal, on August 31st.

“We chose not to work with estimates and give the budget realism and ‘enable’ the incorporation on the basis of such difference in inflation”, says Cajado.

This point would make a difference because inflation in the 12 months until June should remain below 4%, while the indicator accumulated until the end of 2023 (and which could be used by the government, according to the proposal) should approach 6%, given the perspective of acceleration in prices.

“If this adjustment was not given [ou seja, se fosse mantida a correção até o meio do ano sem nenhuma medida adicional], the substitute would reduce about 2% of the expenditure limit for the year 2024 (around BRL 40 billion), without considering the effects on inflation in the second half of the new fuel policy announced by Petrobras. What we did, therefore, in the substitute, was to create a rule [para] that there was no such loss”, added the rapporteur in a note.

In an interview given in São Paulo, Haddad also contested the market numbers. “There’s no way [chegar em R$ 80 bilhões extras], because at the maximum growth of 2.5%, assuming primary expenditure of 20% of GDP, we are talking about 0.5% of GDP. That is if the report had not included in the ceiling a series of expenses that are excluded from the ceiling that is being revoked, such as, for example, the capitalization of state-owned companies”, said the minister.

According to him, the setting of a 2.5% increase in the first year was adopted to avoid “a problem”, since many of the revenue recovery measures adopted by the government at the beginning of the year will not yet be captured by the framework rule in a way to allow for the greatest expansion of expenses in 2024.

“The re-encumbrance of fuels that was made by this government in the first semester, for example, the increase in revenue was not captured. Several measures taken in this first year of government were not captured by the Federal Revenue”, he said.

The government’s original proposal already foresaw that the increase in revenue that guides the real growth of expenses would be measured according to the accumulated values ​​in the 12 months until June – leaving out any gains in the second half of this year. Still, however, this stronger revenue result, if it materializes, will drive the 2025 cap correction.

Despite the noise surrounding the changes, Haddad said that “in no scenario” will 2024 expenses grow by more than 50% of the increase in revenues in the closed year of 2024. “You will see that expenses will have an increase of less than half of increase in revenue”, he said.

UNDERSTAND THE CONTROVERSY OF FRAME NUMBERS

What does the rule proposed by the government say?
The fiscal framework project foresees an expenditure limit that would be corrected by the accumulated inflation from January to June of the previous year, plus the projected variation for the price index between July and December.
In addition, expenditure could have a real growth equivalent to 70% of the increase in government revenues in 12 months until June of the previous year. The expansion of expenses above inflation, however, must respect the floor of 0.6% and the ceiling of 2.5% per year.

How was the rule in the rapporteur’s opinion?
The rapporteur changed the inflation horizon to adopt the variation observed in 12 months up to June of the previous year —the most recent information available in the elaboration of the Budget proposal. By eliminating the projection portion, Congress hopes to reduce the degree of freedom the government would have to raise the estimate and thereby inflate its spending.
At the same time, the rapporteur authorized the government to increase the amount of expenditure, in case inflation in the second half of 2023 is higher than that observed in the same period of 2022. The difference in 2024 may be permanently incorporated into the spending limit , serving as a basis for the correction of the ceiling in subsequent years.
In another change, the rapporteur set the percentage of actual increase in the expenditure limit at 2.5% in the first year of validity of the new rule. This is the band ceiling stipulated in the proposal.

What is the consequence of the modifications?
Market economists saw the changes as a maneuver to inflate the spending level for 2024 and, consequently, the basis for calculating the limit in subsequent years. The different impacts are:
Up to BRL 40 billion, according to ASA Investments, or BRL 19 billion, according to XP Investimentos, due to the fixation of the real gain of 2.5% in 2024. Analysts expected a lower revenue growth and, by extension, an advance more shy of the spending cap in the first year. The difference in projections results in an increase in fiscal space.
Up to BRL 42 billion for ASA Investments, or BRL 49 billion for XP, due to the change in the correction for inflation and the authorization to adjust the 2024 limit for the higher inflation at the end of this year.

What does the rapporteur say?
Deputy Cláudio Cajado (PP-BA) confirmed the creation of an extra space in 2024 with the changes in the report, but contested the market numbers.
According to him, the Chamber itself had a more timid growth estimate for the expenditure limit in 2024 (1.9%). The government, on the other hand, expected to reach the ceiling of 2.5%. “This 0.6% difference would reach a maximum of R$12 billion,” he said in a note.
Regarding the correction for inflation, Cajado said that the change would imply a smaller readjustment of the ceiling, as inflation at the end of 2022 was low due to the fuel exemption adopted by former President Jair Bolsonaro (PL). In the accounts of the rapporteur, the cut would be equivalent to about R$ 40 billion.
“What we did, therefore, in the substitute, was to create a rule [para] that there was no such loss”, he said. He argued that the opinion only maintains an increase in expenses that had already been foreseen by the government in the original project. “The substitute is not adding any value to what was proposed by the government.”

What does the government say?
Minister Fernando Haddad (Finance) said that “there is no way” the extra space provided by the report could reach R$80 billion.
According to him, the setting of the 2.5% increase in the first year was adopted to avoid “a problem”, since many of the revenue recovery measures adopted by the government at the beginning of the year will still not have influence on the framework in 2024 for allow greater expansion of expenses, only in the following years.
The government itself proposed that the spending limit be linked to the real increase in revenue in the 12 months up to June of the previous year.
“The re-encumbrance of fuels that was carried out by this government in the first semester, for example, the increase in revenue was not captured. Several measures taken in this first year of government were not captured by the Federal Revenue Service”, said Haddad.