Tax rule provides for a real increase in expenses of up to 2.5% per year – 03/30/2023 – Market

The new fiscal rule proposed by the government of Luiz Inácio Lula da Silva (PT) foresees a real growth in 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 level of investment, meeting a political concern of the PT that these expenses are not compressed over time.

The details are announced at a press conference given by ministers Fernando Haddad (Finance) and Simone Tebet (Planning and Budget) this Thursday (30).

How did you anticipate the Sheetthe government proposes a fiscal rule in which the growth of federal expenditures is limited to 70% of the increase in revenues observed in the last 12 months.

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.

In addition, the rule will provide for an interval for the primary result target each year, as a kind of fluctuation band. The primary result is obtained from income minus expenses. Today, there is a single goal defined annually.

If the result of the accounts is better than the upper band of the annual target, the surplus can be used to finance investments. On the other hand, if the government does not manage to reach even the floor of the primary target, expenditure growth will be limited to 50% of the increase in revenues in the following year.

The purpose of the proposal is to replace the spending ceiling, the fiscal rule in force that limits the growth of expenses to the previous year’s inflation — a design seen as very rigid by the current management.

The government’s forecast is that the deficit, projected at 1% of GDP (Gross Domestic Product) this year, will be zeroed in 2024, as shown by Folha. In 2025, the estimate indicates a surplus (collection greater than expenses) equivalent to 0.5% of GDP. In the following year, 2026, the surplus would be 1% of GDP.

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, for example, the increase in expenditure could be up to 1.4%.

Also, the percentage will not be applied linearly to all expenses. With the end of the spending ceiling, the constitutional minimums for health and education will be resumed as they were until 2016: 15% of RCL (current net income) for health and 18% of net tax income for education.

In practice, the advance of these expenses will follow the collection more closely, while other expenses will need to have a more moderate growth to respect the limit as a whole.

The limit will be comprehensive, but some expenses will be left out, including transfers from Fundeb (Fund for the Maintenance and Development of Basic Education) and financial aid for states and municipalities to pay for the nursing floor. These are expenditures approved by constitutional amendment.

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 government has included some barriers to prevent expenditure from keeping pace with revenue when revenue rises significantly, or even if it is necessary to cut spending because revenue has dropped significantly.

The idea is that expenditure growth follows revenue, but up to a limit percentage.

Similarly, if revenues plummet, 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.

The new fiscal framework was presented to Lula in its final format by the Minister of Finance, Fernando Haddad, in a meeting this Wednesday (29) at the Alvorada Palace. Also participating in the meeting were Minister Esther Dweck (Management), the Executive Secretary of the Civil House, Miriam Belchior, PT President Gleisi Hoffmann, and government leaders in the Chamber, José Guimarães (PT-CE), and in the Senate , Jaques Wagner (PT-BA).

Afterwards, Haddad went to the official residence of the mayor, Arthur Lira (PP-AL), to present the proposal to the leaders of the House.

This Thursday, before the official announcement of the proposal, the minister had a meeting with the president of the Senate, Rodrigo Pacheco (PSD-MG), and senators to disclose the details and seek support for the project.

UNDERSTAND THE CHANGE IN TAX RULES

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 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.