Congress opens loophole to set spending ceiling readjustment

The spending ceiling, which is already weakened, is likely to suffer another blow in Congress. The task of estimating the indicator that readjusts this fiscal rule, today from the Executive, can be transferred to the Legislative thanks to an amendment to article 24 of the proposed LDO (Budget Directive Law) of 2023.

In the opinion of Marcos Mendes, who identified the change, it is one more step in the process of expanding Congress’ power over the Budget and weakening the spending limit.

If it succeeds, he says, parliamentarians, who have increased the value of their amendments and seek to make their execution mandatory, would also have the power to open space in the entire Budget.

According to the rule in force, the following year’s budget adjustments are made “provided that the parameters updated by the Executive Power are respected”. The ceiling readjustment follows the IPCA projection made by the Ministry of Finance.

The proposed new version removes the determination that it is necessary to follow the Executive’s parameters, without defining new authors. By the new text, it will be possible to make the adjustments “provided that the updated projections of the Broad Consumer Price Index (IPCA) are respected”

Mendes, who is a columnist for Sheet, participated in the drafting of numerous laws as a legislative consultant and special secretary of the then Ministry of Finance during the administration of President Michel Temer. In his assessment, the change is a risk for the control of all expenses.

“This is a consequence of the change in the criterion of correction of the ceiling, which stopped using the IPCA observed until June, and started using the expectation for the IPCA of the closed year”, says Mendes. “Congress will have incentives to overestimate the IPCA to insert more expenses in the Budget.”

Small adjustments to the indicator’s projection can release good amounts. Considering the 2022 ceiling of 1.68 trillion, for example, each 0.5 percentage point of adjustment in the IPCA adds R$ 8.4 billion to spending.

“They will not have total freedom, as it is necessary to follow the minimum market forecast for the IPCA”, he says. “But there will be a stimulus to the behavior of always overestimating the IPCA.”

There is an additional risk, says Mendes. Under the new rule, the difference between the IPCA estimate used and the actual IPCA verified at the end of the year must be discounted from the ceiling for the following year.

“The readjustments given to the largest in one year can be compensated in the following year, what can generate perpetual pedaling: each year, to make a bigger overestimate to compensate the overestimate of the previous year”, he says.

The LDO project was approved by the commission this Wednesday (29) and is going to be evaluated by Congress.

The rapporteur of the matter, Senator Marcos Do Val (Podes-ES), argues that the change is a step forward.

“The proposal was prepared by the consultancies of the Senate and the Chamber”, says Do Val. “And I emphasize that this liberality for the National Congress makes the Annual Budget Law Project more realistic. For example, last year the Executive’s estimate was well below what was actually carried out, and Congress adjusted it.”

The rapporteur also says that the House will be judicious. “Congress will not use any estimate, and the possible difference is only for the month of December. Until November we will not have estimates, but the inflation actually measured.”

The amendment is based on an interpretation: that although the Constitution determines that it is up to the Executive to send projections to the Joint Budget Commission, the magna letter does not require the commission to use this information. This obligation is contained in the LDO — which can now be changed.

Not everyone, however, agrees with this reading.

Economist Daniel Veloso Couri, executive director of Ifi (Independent Fiscal Institution) states that the wording of the constitutional text is clear in conferring the attribution to the Executive, and that it is not enough to change the LDO. If Congress, however, assumes the prerogative of estimating the IPCA, it reinforces that it will have little room for maneuver

“The fact that there are other estimates, such as Ifi’s own, would embarrass anyone who wants to put a very different number,” he says.

However, Couri says that the ceiling is, in fact, increasingly fragile. The rule still holds major offensives to increase expenses, but has been occasionally circumvented.

At the moment, for example, a PEC is being processed in Congress that seeks to alleviate the effects of inflation and the increase in the price of diesel, gasoline and gas. Initially, it provided for covering losses in states that accepted zero ICMS on fuels. But it evolved into the granting of social benefits, such as raising the value of Auxílio Brasil and closing the queue for those waiting for this financial support.

The measures so far add up to an additional expense this year of R$ 41.25 billion – which will be left out of the ceiling thanks to the institution, in parallel, of a state of emergency. Even though they are qualified as an electoral maneuver by the government, the measures have even the support of opposition parties, given the increase in poverty in Brazil.

The fate of the ceiling is increasingly uncertain. Several economists argue that it is necessary to review this control mechanism. President Jair Bolsonaro (PL) has already talked about changing the rule. The initial proposal of the government program of the leader in the polls, Luiz Inácio Lula da Silva, foresees the trot of the ceiling for another mechanism of control of the inspector.