(crédito: Jefferson Rudy/Agência Senado)

Government studies to put an end to debt instead of spending ceilings

Published on 08/14/2022 06:00

(Credit: Jefferson Rudy / Senate Agency)

Historically, Brazil has not been able to control spending and attempts to contain the massive increase in spending did not last long. This is the case of Constitutional Amendment 95, which created a spending cap (limiting increased expenditures for inflation) and is barely able to hold during the current government. After changing the rule three times since 2020, the government is considering a new framework, which would put an end to debt rather than spending. For analysts, this shift is inevitable, but the timing is ill-fitting.

The proposal that has been circulating since last week is almost ready and, according to government technicians, will be presented to Minister Paolo Guedes “soon”. The idea is to allow real spending to grow when total public debt is between 60% and 80% of GDP. But analysts see the debate as another electoral measure to make room for spending, rather than actually moving toward the promised fiscal boost to the liberal agenda.

Currently, the total public debt, at 78.2% of GDP, has decreased compared to 2020, but it is still above the average for emerging countries, which is 60% of GDP. This fall, according to them, is accurate, because it is caused by inflation, which helps to correct the denominator up, and the nominal GDP, and thus the numerator goes down. Therefore, the trend is to increase in the face of many expenditures contracted this year and next.

It is no coincidence that the cost of debt is already rising in the face of increasing creditors’ mistrust of financial soundness – hampering the central bank’s work in managing monetary policy. The yellow light for the cost of debt is on, as the nominal interest bill is rising and is back in excess of R$500 billion – the highest level since 2016. And with the Selic, currently at 13.75% per annum, it is at 14 % in September, with the notable deterioration of the financial situation, public bond lenders are already demanding higher risk premiums, making the federal government’s debt increasingly costly and more than double digits in a 12-month period.

pri-1408-tetodegastos The ticking bomb economy
pri-1408-tetodegastos The ticking bomb economy
(Photo: Valdo Bergo)

New tax framework

Discussing a new fiscal framework is an inevitable debate in the face of many setbacks in public accounts. Since 2014, the country has failed to meet its primary surplus target and closed its accounts in the red. The solution reached during Michel Temer’s government to restore some credibility was the cap rule approved in 2016. In 2020, the rule was abandoned due to the pandemic, but at the end of 2021, with the approval of the PEC dos Precatórios and a change in the calculation methodology The limit, to make room for R$100 billion in new expenditures, such as the R$400 Auxílio Brasil and decision amendments — the heart of the secret budget controversy — the government once buried the ceiling, experts say. And the last straw was laid with PEC Kamikaze or Elector, which once again circumvented the roof by creating a R$41.2 billion tax bomb by increasing aid to R$600 and creating a series of benefits, including assistance for truck drivers and taxi drivers.

“There is no longer a fiscal framework. And in this second semester, the spending cap is no longer respected. The idea that the government is liberal in the economy is just rhetoric. Practically everything is contradictory and without the logic of interdependence,” he predicts. Economist Simao Davey Silber, Professor in the School of Economics and Management at the University of São Paulo (FEA-USP).

“From day one, the government’s behavior has been to say that it wants a second term. For this, the entire policy has been directed to creating a group of supporters in all segments of society for the incumbent’s political project,” he laments. . Contrary to Guedes’ assertion that the fiscal framework is “strong”, Silber does not doubt the opposite, because this year’s strong revenue increase, aided by inflation, should not be repeated next year, as GDP growth in 2023 will be be “neglected”.

Incidentally, technicians from the economic team claim that there is no place in the 2023 budget for the continuity of these measures created by PEC Eleitoreira, let alone the exemption from income tax for those who earn up to five of the minimum wage (6,060 BRL). Economist Alessandra Ribeiro, partner at Tendências Consultorias, remembers that the next government, whoever it is, will have to deal with the stress of server adjustments.

“The electoral issue clearly has an impact on the design of recent economic policy. The market perception is that, whether it is Bolsonaro or Luiz Inacio Lula da Silva (PT), there will be a change in the fiscal framework,” he says. According to her, the 11.5 billion R$ earmarked for reconfiguring servers in 2023 does not give the scent of claims to recover inflationary losses since 2019, which, according to Tendências estimates, amount to R$75 billion.

Analysts also warn of a sharp increase in subsidies this year. According to a survey by economist Gabriel Leal de Barros, partner at Ryo Asset, the tax exemption account this year should reach R$520 billion, just over 50% more than forecast at the beginning of the year, in contrast. To the proposed regulation for the ceiling – set forth in the event of an emergency in the Public Electricity Corporation, in 2021, which estimated reducing the tax exemption bill to 2% in eight years. Barros warns that “the government needs to present a plan to reduce this subsidy by September of this year.”

However, this imposition is seen as a “joke” among government technologists, because there is no penalty for non-compliance. The Economy Ministry, which declined to comment on the rampant increase in subsidies, has largely sought to reduce the cost of fuel at the pumps during the campaign.

“The government only loses credibility when it decides to change the fiscal rule every time it wants to increase spending,” says Alex Agustini, chief economist at Austin Ratings. For him, this fourth change in the spending ceiling is worrying, because the current scenario is not suitable for changing the existing rules, which must be adhered to and not constantly changed.

Economist Joan Jensen, a partner at 4 Intelligence (4i), joins the group that says the fiscal issue is a concern with the large number of changes to the spending cap. “The first time, during the COVID-19 pandemic, it was understandable, because it was an exception due to a global emergency. Now, you can’t put too many exceptions to the rule,” he warns.

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