Tax framework: understand the main points – 03/30/2023 – Market

The government of President Luiz Inácio Lula da Silva presented this Thursday (30) its proposal to balance public accounts and prevent public debt from growing in a way that is harmful to the country. Called a fiscal rule, or fiscal framework, the proposal was detailed by ministers Fernando Haddad (Finance) and Simone Tebet (Planning and Budget) this Thursday (30).

The new fiscal rule proposed by the government of Luiz Inácio da Silva (PT) foresees a real growth —that is, discounting inflation— of expenses between 0.6% and 2.5% per year. These are the floor and maximum limit for advancing spending.

The design also provides for a minimum threshold for investments, so that these expenses are not compressed over time.

What is the new fiscal framework?

It is the set of control rules for public accounts. The government’s proposal seeks to replace the current spending ceiling, created during the government of Michel Temer (MDB).

Why is the government replacing the ceiling?

The government considers that the spending ceiling has limited the State’s ability to promote public policies. Despite this, it recognizes that it is not possible to do without a control rule for expenses.

What is needed for the roof to be replaced?

A constitutional amendment enacted at the end of 2022 establishes that the government must present, by August 31, a new proposal for a fiscal rule through a supplementary bill. Once the proposal is approved by Congress, it will replace the spending cap – which will be automatically revoked.

How is it today?

Spending ceiling: rule inserted in the Constitution and which has been in force since 2017. It prevents federal expenses from growing more than inflation from one year to the next.

Primary outcome goal: provided for in the Fiscal Responsibility Law, is stipulated in numerical value each year in the Budgetary Guidelines Law. The result is obtained from the difference between income and expenses in the year. Today, it is a unique goal and needs to be fulfilled by the Executive.

What is the government’s proposal?

Expenses allowance: instead of the spending cap, spending could grow by the equivalent of 70% of the rise in revenues (for example, if revenue rises by 2%, spending can rise by up to 1.4%). There will, however, be minimum and maximum limits for this variation in spending. The minimum percentage prevents a sudden or temporary drop in tax collection from forcing the government to reduce expenses. The maximum limit, on the other hand, removes the risk of the Executive expanding expenditures in an exaggerated way when there is a peak in revenues.

Primary outcome goal: instead of a single goal of public accounts results to be pursued by the government, there will be a projected range for the fiscal year and the Executive will need to close the fiscal year within this band.

How much should spending grow if the rule is passed?

The new fiscal rule foresees a real growth (inflation discounted) of expenses between 0.6% and 2.5% per year. These are the floor and maximum limit for advancing spending.

In practice, the government intends to work with a new restriction on expenses, which would have real growth (above inflation), but at a slower pace than revenue. This combination is considered crucial for improving the situation of public accounts in the coming years and stabilizing the path of public debt.

Why is the surplus important?

The positive difference between income and expenditure is considered a good indicator of the economic health of a country. With more revenue than spent, the government guarantees resources to pay interest on the public debt.

If debt is falling, investors demand lower rates to borrow money.

In a deficit scenario, the opposite occurs. Creditors charge more to finance government debt, which can generate a snowball effect of public debt.

Why do investors care so much about the fiscal agenda?

If a government does not present a fiscal plan to contain public debt, the tendency is for creditors to charge more to borrow money.

With more expensive interest, financing becomes less attractive, credit for the private sector becomes more expensive, which can become an obstacle to economic growth.

With no prospect of growth, investors are less motivated to invest in companies and projects in the country.

What does the fiscal agenda have to do with a country’s outlook?

If a country is seen as fiscally irresponsible, interest rates tend to rise. The currency also tends to devalue, which increases the risk of extra inflation. This scenario harms economic growth and, consequently, the supply of jobs.

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understand the tax

Check out some of the main terms used in discussions about public accounts in Brazil.

FISCAL FRAMEWORK OR REGIME

Name given to the set of principles and formal rules that seek the stability of public accounts. The spending ceiling is an example of a fiscal framework, which sought to limit primary expenditures to the same amount as in the previous year corrected for inflation.

CENTRAL BANK

Government financial institution responsible for ensuring the stability of the country’s currency and regulating the financial system. Among its attributions are issuing paper money, implementing monetary policy —by controlling interest rates— and overseeing financial institutions.

COPOM

The Copom (Monetary Policy Committee) is a body of the Central Bank that meets periodically to define monetary policy guidelines and the Selic rate (basic interest rate for the economy).

DEFICIT

In accounting, it’s when expenses exceed revenues, the opposite of balance. In the case of the public deficit, when government spending is greater than revenue.

NOMINAL DEFICIT

Includes interest expenses and monetary restatement (adjustment of the amount to inflation).

PUBLIC DEBT

Debt contracted whenever the government spends more than it collects, that is, when taxes and other revenues cannot cover expenses. In order to meet the needs of public services, the government resorts to financiers, such as individuals, companies and banks.

GROSS DEBT

Covers the total debts of the federal government and regional entities (state and municipal governments) to financial and non-financial, public and private companies, including abroad.

NET DEBT

It is the gross debt minus credits receivable from all entities (federal, state, municipal, BC and state governments) and reserves (a kind of savings, in dollars) of the country.

BUDGET GUIDELINES LAW (LDO)

Law that defines the goals and priorities of the federal public administration for the following year. With a duration of one year, the LDO sets limits for the budgets of the Powers and guides the elaboration of the LOA (Annual Budget Law).

ANNUAL BUDGET LAW (LOA)

It is the budgetary law itself, with an estimate of revenue and setting of public expenditure. In practice, it indicates how the government will collect and how it will spend public resources. It lasts for one year.

INFLATION TARGET

It is the minimum or maximum value that inflation can reach in a given period. In the system adopted in Brazil, an inflation target is set for the year, with a tolerance band that provides for a higher value (ceiling) and a lower value (floor) in relation to the set value (center of the target).

FISCAL TARGET

Defines the result that the government should achieve in the year considering revenue minus expenditure.

PUBLIC BUDGET

Instrument of initiative of the Executive Power to estimate revenues and set expenses. It comprises three laws: the multi-year plan (PPA), the budgetary guidelines (LDO) and the annual budget (LOA). It is prepared in one fiscal year, approved by the Legislature, and takes effect in the following fiscal year.

GDP

Gross Domestic Product is the sum of the value of all goods and services produced in a country or region during a given period.

MULTIANNUAL PLAN (PPA)

Law that establishes guidelines, objectives and targets for public administration expenses for the next four years. It plays a central role in organizing State action.

GOLDEN RULE

Provided for in the Constitution, it requires that indebtedness does not exceed the amount of investment expenses. The goal is to avoid contracting public debt to pay current expenses, such as civil servants’ salaries and pensions.

PRIMARY OUTCOME

Indicator of the State’s financial health, consisting of the difference between revenues from the collection of taxes and fees, for example, and expenses to maintain the public machine and the provision of services to society, not including financial expenses with the payment of interest on the public debt. When revenue exceeds expenditure, the result is called a primary surplus, when expenditure is greater than revenue, there is a primary deficit.

SELIC

Selic (Special System for Settlement and Custody) is the Central Bank system that registers trades with federal public securities and interbank deposits. The interest rate practiced in this system serves as the basic interest rate for the Brazilian economy.

EXPENSES CEILING

Tax regime that sets limits for the primary expenses of the bodies of the Executive, Legislative and Judiciary, the Federal Public Ministry, the National Council of the Public Ministry and the Federal Public Defender’s Office.