Treasury suggests limiting health and education floors – 07/13/2023 – Market

The constitutional minimums for health and education can be corrected by the same expenditure limit rule provided for in the new fiscal framework, which allows growth between 0.6% and 2.5% above inflation, suggests the National Treasury in its Projection Report Tax released on Wednesday (12).

The option mentioned in the document does not necessarily reflect a government decision, but it is a symptom of the concern of technicians with a challenge already contracted under the new fiscal rule. The floors in these areas will grow again at a faster pace due to the end of the spending cap and the consequent return to the constitutional rule that binds them to revenue, which should increasingly flatten other expenses over the years.

“The use of a consistent indexer [para saúde e educação] with the global expenditure correction mechanism, it would increase the predictability of these expenditures and reduce budgetary rigidity compared to current rules in times of economic expansion”, says the Treasury report.

The Ministry of Finance discusses presenting, by the end of the year, a PEC (proposed amendment to the Constitution) to change these links and harmonize the trend of expansion of these expenses with the limitation of the new fiscal framework. In April, Minister Fernando Haddad anticipated the debate in an interview with Sheet.

With the approval of the new fiscal framework scheduled for this year and the consequent revocation of the spending ceiling, the constitutional floors of the two areas will again follow the rule that was in force until 2016, which linked them to a proportion of the collection: 15% of the RCL ( net current income) for health and 18% of RLI (income after taxes) for education.

This simple change could occupy a space of R$ 30 billion to R$ 35 billion within the new expenditure limit, according to calculations by economists. The difference is because, under the spending ceiling, the minimums were disconnected from revenues and started to follow a correction rule only for inflation —which flattened the minimum amounts dedicated to these areas.

The government of Luiz Inácio Lula da Silva (PT) defended the recomposition of resources by articulating, still in the transition, the approval of a PEC (proposed amendment to the Constitution) to make room in the 2023 Budget, compressed by the spending cap rule .

With the advancement of the framework, however, the discussion of the change in bindings entered Haddad’s radar, who aims to ensure the sustainability of the new fiscal rule in the medium and long term.

Treasury simulations help illustrate part of the problem. When reproducing the rules of the framework on the fiscal dynamics between 2009 and 2022, the agency finds that the expenditure limit would have had an average growth of 1.3% per year, after discounting inflation. The revenue indicators that mark the minimums in health and education would have had an average expansion of 3.1% per year.

It is this mismatch that worries the Ministry of Finance. “The mismatch between the expenditure limit index and the revenues that link specific expenditures is harmful to fiscal planning and can affect the composition of public spending in an undesired way, by reducing the fiscal space available for other policies”, says the Treasury.

“In this sense, an option to replace the current indexes would be the use of the real variation of the expenditure limit, which would imply a minimum growth of 0.6% per year, making it impossible to actually reduce these expenses, in order to reduce the volatility of costs. resources applied in these policies”, he adds.

Another option, according to the agency, would be to tie the floors to a proportion of the actual variation in the spending limit – which could impose an even slower pace of advancement of the minimums.

The same concern applies to other expenses linked to the dynamics of revenues, such as the FCDF (Constitutional Fund of the Federal District) and individual and bench parliamentary amendments. Both expenses have minimums linked to RCL.

Of these, the only binding that is not guaranteed in the Constitution is that of the FCDF. In the Chamber, the rapporteur for the fiscal framework, deputy Cláudio Cajado (PP-BA), included an article to link the correction of the fund to the same rule of the general limit of expenses, but the change was overturned in the Federal Senate (which can still be reversed by the neighboring House).

Any of these options tends to face resistance within the government’s own base. The PT was one of the most critical acronyms to the change in the health and education floors, which, under the spending ceiling, had their growth linked to correction only for inflation. It is a discussion similar to the one that takes place now, although the Executive intends to ensure greater flexibility by allowing real gains.

Maintaining the current rules could have a negative effect on discretionary expenses, which include machine costs and investments in excess of the floor of 0.6% of GDP (Gross Domestic Product) created by the proposal.

In its simulations, the Treasury divided discretionary spending into two categories: rigid (which include expenses immune to cuts, such as constitutional minimums, amendments and the investment floor) and others (which are subject to blockages and contingencies to comply with tax rules).

In 2024, rigid discretionary expenses reach BRL 159 billion, while the others reach BRL 63 billion. Over the years, rigid spending grows continuously, while the others reach a peak of BRL 101 billion in 2026, but then start to fall until they are reduced to BRL 39 billion in 2032. The numbers are displayed in 2023 prices .

An important point is that this scenario does not include the additional tax collection effort that the government needs to make to meet the fiscal targets set until 2026.

The paradox is that, if Haddad succeeds in his plan to raise revenues, the situation on the expenditure side (if their dynamics are not modified) will become even tighter —precisely because the constitutional minimums, amendments and the FCDF grow along with the bonanza on the revenue side.

In this scenario, the space for discretionary as a whole would be smaller in 2024, and almost all of it would be occupied by rigid spending, which would add up to R$ 168 billion. Only R$ 1 billion would remain for other expenses. Throughout the analyzed period, the peak for these other free expenditures would be BRL 55 billion in 2028.

“The high level of commitments tends to extinguish allocative discretion, as it reduces the volume of free budget resources that would be essential to implement priority government projects, which meet the needs of the population at every moment of time”, warns the Treasury when recommending the changes .

“Thus, as a rule, earmarking resources is not recommended. However, in the case of existing bonds, if you decide to revisit them, it is important that the earmarking favors the predictability and execution of the policies that you intend to prioritize .”