Treasury discusses linking expenses to per capita indicators in new fiscal rule – 02/24/2023 – Market

The Ministry of Finance discusses predicting in its proposed new fiscal framework a link between federal spending growth and the projected trend for economic variables within a medium-term horizon.

One of the points under discussion is the possibility of some public policies having their expenses linked to per capita indicators. Another alternative would be to create a spending target per beneficiary served by these programs.

If these expenditures grow in line with the advance of GDP (Gross Domestic Product) per capita, for example, the logic of the evolution of government expenditures as a whole changes.

These are just options suggested in the debate that is being conducted with great reserve within the Treasury. There is still no decision on how the final design will look, which may undergo changes and will then need to be validated by the Planalto Palace.

Last week, the Minister of Finance, Fernando Haddad (PT), announced his intention to bring forward the proposal for a new fiscal framework, which should now be presented in March. Before, the forecast was to announce the project in April.

The signal came amid the crossfire faced by the economic team, in the face of clashes between President Luiz Inácio Lula da Silva (PT) and the Central Bank over the interest rate and the definition of the inflation target.

The new rule is one of Haddad’s team bets to improve agents’ expectations in relation to the sustainability of the country’s accounts and convey confidence in the government’s determination to pursue this objective.

One of the assumptions already verbalized by members of the economic team is the intention to have some spending limit, more flexible than the current spending ceiling —considered too rigid and inefficient by Haddad’s team.

The diagnosis is that, in order to achieve its medium-term goals and keep the debt on a healthy path, the simplest thing for the government is to control the speed of growth of public spending.

Another principle put forward by the technicians is that the framework should bring a medium-term vision, not only to be in tune with the international trend in the subject, but also to create a more stable horizon for public policies.

The current spending ceiling is corrected for the previous year’s inflation. As some expenses grow above this index, other expenses have been flattened over the years, including investments and some actions in the social area.

The new government wants to avoid this by authorizing an increase in expenses above inflation. The key issue is which indicator(s) to use in the proposed design.

Still during the campaign, Lula’s team even discussed the possibility of using GDP growth as a reference. Now, with the deepening of the debates, the assessment is that this would make the rule less restrictive than necessary to resume the surplus and put the debt back on a downward path.

As the Brazilian population increases year by year, the wealth generated in the country is divided among a larger number of people. Therefore, it is natural that GDP per capita has a growth rate slightly below that observed in aggregate GDP.

This would be a way of causing expenses to 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.

Some simulations were performed with these parameters, but no decision has yet been made. One of the doubts to be taken into account is whether the arrangement is sufficient to meet the desired objective of exhibiting a sustainable debt trajectory.

During the government transition, the Economics technical group had already discussed the possibility of linking expenses to per capita indicators or the number of policy users. The team was made up of economists Nelson Barbosa (former Planning Minister), Pérsio Arida (former BC President), André Lara Resende (former BNDES President) and Guilherme Mello (current Secretary of Economic Policy).

The group’s final report, which is not public, was obtained by Sheet through the Freedom of Information Act. The text says that the long-term fiscal plan “should review the current primary spending floors, revenue linkages and expenditure indexation, seeking to establish real spending targets per capita or per beneficiary of programs or public policies, where this is appropriate, in order to reduce the rigidity of the federal budget”.

The excerpt appears at the end of the document “Annex I – Suggestion for the reform of the fiscal regime”, which has three pages and was delivered to Haddad for possible consideration in future discussions by the portfolio.

The Constitution provides for spending floors for health and education, although the areas are not directly mentioned in the report. Until the spending cap was created, the minimums were the equivalent of a percentage of Union revenue. The fiscal rule maintained this logic in 2017, but determined that the nominal value would only be corrected for inflation from 2018 onwards.

Other expenses are indexed to price indices and are automatically corrected, such as social security benefits and part of assistance transfers.

The transition group’s suggestion was to create real spending targets per capita, or per beneficiary, but the text does not detail for which areas. As a principle, this design is seen today by members of the government as a more intelligent way of scaling public policy, instead of simply fixing a percentage of revenue or GDP.

The transition group’s report also suggested a specific target for spending on personnel, defined based on a pluriannual plan for careers, competitions and salary adjustments.

The document also recommended that the complementary bill to be sent by the government bring in its text the principles of the fiscal framework, but without setting numerical targets, which would be stipulated within the scope of the PPA (Pluriannual Plan), presented in the first year of each mandate, with the possibility of annual review.

The preference for a medium-term horizon in formulating the fiscal framework also makes it necessary, in the opinion of government technicians, to use projections for indicators such as inflation and GDP —and not indicators that have already been measured and about which there is no controversy.

The concern, inside and outside the government, is with the discretion involved: in theory, estimates can be changed according to the occasion. In the past, when the main fiscal rule was the primary surplus, it was common for the government and Congress to inflate revenue projections in order to boost spending without revising the target.

Behind the scenes, technicians recognize that the path chosen makes it necessary to seek credibility and solidity in the projections used in the framework. On the other hand, a technician points out that projections are not infallible, even those of the market, and therefore it is necessary to discuss the possibility of correction mechanisms in expenses, in case the outlined scenario does not materialize.

There is also an assessment that strict limits, such as the spending ceiling, are difficult to comply with and, therefore, end up encouraging the circumvention. In the government of Jair Bolsonaro (PL), at least five constitutional amendments were approved to circumvent the expenditure limit.