The good design of tax rules – 04/04/2023 – Policies and Justice

In the fiscal field, the current Brazilian debate has focused on the reformulation of fiscal rules, more specifically the spending cap. Having well-designed rules is essential to signal a government’s commitment to fiscal discipline. In this article, I will talk a little about the necessary characteristics for a good design of these rules, pointed out in the international literature.

Before dealing with the characteristics of the tax rules themselves, it is worth understanding what they represent and why they are useful. According to the IMF (National Monetary Fund), fiscal rules consist of numerical restrictions on a given budget aggregate, for example, limits on expenditure, primary result, debt, etc. According to the Fund, these rules are useful, as they help to promote more prudent and stabilizing fiscal policies.

An essential aspect of a good rule is in relation to flexibility mechanisms. This characteristic was fundamental in the context of the pandemic. The need for additional government spending to tackle the Covid-19 crisis required a temporary departure or adaptation of the rules. Several countries have triggered safeguard clauses to circumvent or suspend tax rules.

In Brazil, the execution of expenses related to the pandemic took place via extraordinary credit. However, as warned by the IMF, the use of this flexibility should be temporary and carried out in a transparent manner. It is important that in the design of the fiscal rule, the question of flexibility is well designed, to the point of requiring an explanation of the deviation from the rule and also having clear mechanisms regarding the process of returning to the limits. These questions are important to preserve credibility.

Another characteristic of extreme relevance in the design of these rules corresponds to simplicity. It has to be transparent enough to allow society to monitor it. In order for it to be easy to communicate and follow up on, it must be simple.

Finally, it is worth talking about its sustainability and applicability. It must contribute to the sustainability of public accounts. Here, aspects such as forecasting and medium-term planning gain an outline.

It is noteworthy that the rule is one of the instruments to be used in the context of fiscal and budgetary governance. Among the elements cited by Caselli and co-authors are the institutional strengthening of the IFIs (Independent Fiscal Institutions), or Fiscal Councils, and the focus on medium-term sustainability, through longer budget planning (The Return of Fiscal Rules, 2022) .

The spending cap is currently in effect. This rule was created through EC 95 of 2016 and underwent several changes. The last corresponded to EC 126, of 2022, which, in addition to modifying and expanding the ceiling, established a deadline for the Union to submit a new rule to replace the current one.

On the 30th, the government presented the initial design of the fiscal rule that should be sent to Congress to replace the current spending cap. However, the bill, which should detail the proposed design, has not yet been exposed. After its full disclosure, it will be possible to evaluate it in the light of the characteristics presented in this article.

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The editor, Michael França, asks that each participant of the space “Politics and Justice” from Folha de S.Paulo suggest a song to the readers. In this text, the one chosen by Vilma Pinto was “Feeling Good”, by Nina Simone.

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