The new framework: simple, predictable and believable? – 04/24/2023 – Cecilia Machado

Simplicity, predictability and credibility. These are three important principles of a fiscal framework that seeks to ensure macroeconomic stability and create conditions for growth. A simple rule is one that everyone understands and that clearly communicates the trade-offs involved in choices. Predictability, on the other hand, allows inferring the evolution of public spending over the years and what adjustments will be necessary to guarantee the state’s solvency. Finally, a rule is credible when it establishes conditions for the government to fulfill what it promised. Was the newly announced framework simple, predictable, and believable?

In general terms, the framework establishes expenditure growth as a function of revenue —with limits defined in the first year of the new government for the four years ahead— and a primary surplus target (and projections for the following three years) established annually in each LDO. The parameters, defined at each political cycle, determine the rule. For the next four years, the government established the real growth in expenditure at 70% of the real growth in revenue, which cannot be less than 0.6%, nor greater than 2.5%, with a balance between expenditure and revenue (primary reset) next year. Altogether, this is a clearly expansionist rule, whose adjustment takes place on the revenue side, and implies an increase in revenues in the order of R$ 150 billion already in 2024.

As much as there may be several alternatives to expand collection, either through the review of exemptions —as in the case of the return of fuel taxes—, whether with tax incentives —as in the Manaus Free Trade Zone—, or even with the elimination of loopholes —such as the tax on low-value imported goods— our recent history shows that these are unpopular adjustments that are difficult to implement.

In 2024, the government has revenue coming from the taxation of ICMS tax benefits, whose fiscal impact, estimated at BRL 80 billion, in addition to being uncertain, depends on the understanding of the STJ if these can be included in the IRPJ calculation basis and CSLL owed to the Union.

Regarding the operation of the rule, it can be said that the criteria established for the evolution of expenses are objective, but their calculations depend on variables that are extremely difficult to project even in a short period of time, such as 2 to 3 years ahead . For example, projections for actual revenue growth depend on a number of factors, ranging from growth to commodity prices. And, the longer the horizon, the greater the uncertainties about them. A rule that depends on too many unknown variables (or on assumptions about the economic environment) loses simplicity.

In addition, the definition of a primary target for each LDO increases uncertainties about the primary trajectory that will be pursued in the four years of government, since the definition of a dissonant target from previous projections is not prohibited. In other words, no matter how much the LDO stipulates primary projections for the following years, the target can always change when there is collection frustration, since failure to meet the target in one year reduces expenditure growth in the following year (50 % instead of 70% of actual revenue growth). This means that the primary projections published in the LDO give little predictability to the evolution of the debt over the course of a government.

And, considering that each new government can redefine the parameters of the framework according to its preferences, exercises for projecting the trajectory of the public debt for more than four years ahead acquire an aspect of futurology. A rule that changes with each political cycle does not serve the purpose of anchoring the state’s solvency expectations.

Finally, it should be noted that the new framework does not provide subsidies for the government to limit spending in the event of revenue frustration, nor does it characterize non-compliance with the primary result target as a crime of fiscal responsibility, reducing the chance of compliance with the established flight at LDO.

Many argue that one of the great advantages of the new framework is that it gives the elected government flexibility to implement the policies that elected it. Nothing more just. But a complex rule, which depends on uncertain variables, with parameters that are redefined at each political cycle, gives very little predictability to the trajectory of the debt, especially in the absence of mechanisms that credibly guarantee the fulfillment of the promise.

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