Tax rule: how is the government debate going – 03/16/2023 – Market

The idea of ​​creating individual spending targets for different types of expenditure –such as funding the public machine, investments and even personnel– faces resistance in the government’s debates on the new fiscal rule.

The model with separate targets was suggested by the group of transition economists in a report delivered to the Minister of Finance, Fernando Haddad (PT), to allow stricter control or more flexible growth of certain expenses, according to category.

Expenses with civil service payroll, for example, could have their own lock, while expenses with public works would have a separate target.

The model, however, still arouses discussions. A wing of the government sees in the idea a factor of paralyzing the Budget.

According to reports made to the Sheetmembers of the government defend a rule focused on global spending –which would bring more flexibility and avoid worsening the so-called budgetary rigidity (when the government has little room for maneuver in the use of resources).

In this way, with fiscal space, the government could allocate more resources in investments in a given year, without being tied to a specific spending target that grows according to a predetermined rule.

The details of the new fiscal rule are not yet known, but members of the Ministry of Finance have already given public indications that the proposal should contain mechanisms to control the speed of growth in spending.

In January, the Secretary for Economic Policy at the Ministry of Finance, Guilherme Mello, stated that controlling expenses is the best instrument to manage the trajectory of the public debt.

Mello stated at the time that the next Brazilian fiscal framework has to dialogue with the new global trends and be a rule that points out the trajectory of some central variables, including the public debt. According to him, another instrument would also be needed to deal with this, the primary result.

“And that there be a rule that works with a public spending horizon, which is what the government has more control over. It has some over revenue, but it has more control over spending,” he said less than two months ago.

Whatever the final format of the text, government representatives claim that the rule for expenses will be more flexible than the current spending ceiling – which limits the growth of expenses to inflation variation. Therefore, the search for more revenues will be an important component of the fiscal stability that the Ministry of Finance claims to seek.

The government claims that the fiscal rule will make it possible to reach the goal of zeroing the deficit in 2024. The goal is seen as challenging, since its fulfillment depends not only on the proposal, but on other economic variables that, at the moment, assume an unfavorable bias – as a possible crisis in the financial system and its impact on the global economy.

On the other hand, there is the interpretation in the government that the very presentation of a fiscal rule, which by definition means greater restriction, by a left-wing government, seen as more prone to increased spending, can become a factor of positive surprise for the market and the productive sector. If this reading does in fact prevail, the economy and revenue could benefit from these gains.

The Ministry of Finance intends to present its proposed tax rule in detail to the Planalto Palace this Friday (17). President Luiz Inácio Lula da Silva (PT) and Minister Fernando Haddad already had a first conversation about the rule, and the Chief Executive intends to arrive at a final model by next week.

The central objective of the rule, according to the government, is not only to recover fiscal sustainability (to be measured above all by the level of public debt), but also to allow adequate financing of public policies – in addition to restoring the credibility of macroeconomic policy, with predictability and transparency, say government officials.

One of the most sensitive points in the discussion is convincing the political class, since the PT itself has been critical of proposals for greater fiscal restrictions.