Tax rule: percentage on revenue would limit spending – 03/29/2023 – Market

The government of Luiz Inácio Lula da Silva (PT) proposes in its fiscal rule design that the growth of federal expenses be limited to 70% of the increase in revenue projected for the same year, according to information obtained by Sheet.

In practice, the government would be working with an expenditure lock linked to revenue growth, and a primary result target with bands, resulting from the difference between these two elements.

The design was designed so that expenditures have a real increase (above inflation), but at a more moderate pace than the increase in revenues —a combination considered crucial to obtain a gradual reduction in the public deficit and stabilize the public debt.

The government’s forecast is that the deficit, projected at 1% of GDP (Gross Domestic Product) this year, will be zeroed in 2024. GDP. In the following year, 2026, the surplus would be 1% of GDP.

In internal discussions, the government even carried out simulations with different percentages of 50%, 70% or 80% on the increase in revenue. The definition of this proportion is, in practice, what will dictate the speed of adjustment in the country’s accounts.

The percentage of linkage between expenses and revenues will be fixed, although each year its application to the new estimates will lead to different numbers of space in the Budget.

The idea is that, when projecting revenue growth for the following year, the government obtains, as a consequence, the limit of expenditure advancement. In the scenario where the estimated increase in revenue is 2% in real terms and the percentage increase in spending on it is 70%, the increase in expenditure could be up to 1.4%. The numbers are illustrative.

Due to the way it was designed, the proposal has a pro-cyclical character, that is, it allows for an increase in expenses when there is an increase in revenue and growth, while at the same time imposing moderation in downturns. Avoiding this was one of the principles defended by economists from the PT itself.

For this reason, the tendency is for the government to include some barriers to prevent expenditure from keeping pace with revenue when revenue rises significantly, or even if it is necessary to cut expenditure because revenue has dropped significantly.

The idea is to predict that expenditure growth will follow revenue, but up to a limit percentage.

Analogously, if revenues dip, the increase in expenses will respect a floor to be indicated in the proposed new fiscal rule — which will also be a percentage number, according to a member of the economic team.

In addition to reducing the pro-cyclical bias of the proposal, the government’s assessment is that these mechanisms remove any possible incentive to overestimate revenues — precisely what happened when the main reference for public accounts was the primary result.

Before the spending ceiling, approved in 2016, Congress included revenue forecasts in the Budget only to create ballast for increased expenses. Then, when collections were frustrated, the government needed to limit spending or change the fiscal target.

With the lock designed by the Lula government, even if parliamentarians expand revenue projections, there would be a limit to the advancement of expenses. After a certain level, any additional collection (expected or actually carried out) would only widen the differential —that is, improving the primary result and contributing to the stabilization and reduction of the public debt.

In another scenario, if there is revenue frustration during the year, the government would still need to meet the primary result target stipulated in the Budget. This means, eventually, containing expenses to avoid violating the rule.

As shown to Sheetthe new fiscal framework must have adjustment triggers linked to the primary result.

If the primary result is considered poor in relation to a certain level, restrictions are put in place to increase spending.

The adjustment instruments are an important signal within a fiscal framework that targets the medium term and will have in the projections for this horizon a foundation to try to convince investors that the accounts are sustainable.

The proposal to tie the spending restriction to the debt, which is defended by many economists who wrote suggestions for fiscal rules, is discarded by technicians and authorities heard with reserve by the report. The indebtedness indicators should only work as a reference.