The risks to the PEC public accounts that boost social spending in an election year

The Senate approved this Thursday (30) the PEC (proposed amendment to the Constitution) that opens a gap for the government of President Jair Bolsonaro (PL) to pierce the spending ceiling and boost social programs just over three months before the elections. . The PEC now goes to the Chamber of Deputies.

If approved by the deputies, its impact on public coffers could reach R$ 41.2 billion.

Nicknamed “PEC Kamikaze”, it proposes the recognition of the state of emergency, which, in theory, would provide legal support for the government to create benefits in an election year. Electoral law prohibits this practice as a measure to prevent unequal competition between candidates. On the other hand, the legislation also provides that in emergency situations, the creation of benefits or increased expenditures would be allowed.

In the justification presented by the PEC rapporteur, Senator Fernando Bezerra (MDB-PE), the emergency situation would be justified by the increase in fuel prices and inflation.

The government defends the measure saying that it is important to reduce the impact of high inflation on the most vulnerable people. The PEC plans to create benefits for self-employed truck drivers of R$ 1,000 per month until December this year (the “truck voucher”), an aid for taxi drivers, increases Auxílio Brasil from R$ 400 to R$ 600 (zeroing the queue for the benefit ), doubles the value of Auxílio Gás, compensates states for free public transport for the elderly, provides subsidies for ethanol production through tax credits, among other measures.

The proposal, however, is being discussed as Bolsonaro appears in second place in the most recent polls, behind former president Luiz Inácio Lula da Silva (PT). In addition, according to a survey by the Datafolha Institute released in March this year, 68% of respondents attribute the responsibility for the rise in fuel prices to him.

Economists interviewed by BBC News Brasil, however, warn that government-backed PEC could have negative effects on the economy in the short, medium and long term. Among them are: increased public spending, market distrust of fiscal policy; pressure on the interest rate; rising inflation; and fiscal difficulties for whoever takes office in 2023.

Increase in public expenditure

The increase in public expenditure is the most immediate risk identified by economists interviewed by BBC News Brasil. According to them, the BRL 41.2 billion above the spending ceiling significantly compromises the country’s fiscal policy.

“Adding the R$ 42 billion of this PEC with the impact of R$ 100 billion of the project that changed the ICMS (tax on the circulation of goods and services), we have an action of about R$ 150 billion. And this account tends to grow even more. Perhaps we are the country that is spending the most in the world to face the fuel crisis, but the quality of spending is lacking”, says Leo Cézar, economist, consultant to the Senate and one of the creators of the IFI (Independent Fiscal Institute).

For the chief economist of stock manager Ryo-Asset and former director of the IFI, Gabriel Barros, the initial cost of the PEC estimated at R$ 41.2 billion may be even higher because the recognition of the state of emergency creates a legal loophole. so that the government can make more unforeseen spending.

“This state of emergency opens the possibility for the government to expand, even more, the expenses foreseen in the PEC. And they are expenses of difficult social control. That is, we will only know the total spent by the government when the TCU (Court of Auditors) of the Union) is to analyze the management of federal public accounts”, he explains.

market distrust

The second risk pointed out by economists is the increased distrust of the market in relation to the country’s fiscal policy. They argue that, in recent months, this confidence had already been eroded by another PEC, that of precatories, approved last year and which opened up an extra space in the government budget that could reach R$ 104 billion. To a large extent, the PEC made it possible to pay, on an emergency basis, the Auxílio Brasil of R$ 400.

For Gabriel Barros, the proximity between the two PECs diminishes the market’s confidence in the government.

“We are amending the Constitution every six months. This creates additional uncertainty in a year that is already sensitive due to the elections and the market begins to look at Brazil with less certainty about how public accounts will be managed”, he says.

For the coordinator of the center for management and public policies at Insper, André Marques, the “PEC Kamikaze” creates instability in the market and generates distortions that Brazil has already experienced in the past.

“We already had something similar when Dilma Rousseff changed the electricity tariff so that the population had a momentary gain. The result is that this gain turned into a loss in the future and the market reacted by reducing investments in the sector, for example”, it says.

Inflation and interest pressure

The pressure on inflation and interest rates, economists say, is a direct consequence of the market’s distrust in the government’s ability to adjust its accounts. For 2022, the country’s inflation target was forecast at 3.5% with a tolerance of 1.5 percentage points.

According to the IBGE (Brazilian Institute of Geography and Statistics), the inflation accumulated in 2022 until May according to the IPCA (Broad Consumer Price Index) is already 4.78% and, in the last 12 months, it is at 11.73 %. According to the BC (Central Bank), the estimate is that accumulated inflation for 2022 will reach 8.8%.

The basic interest rate stipulated by the Central Bank, the Selic, is on an upward trend. In January 2019, it was 6.5% per year. Now, it is at 13.25%.

“If the government increases spending in an uncontrolled way, the government will need to pay more interest to finance its debt. The market begins to distrust the government’s ability to pay. This creates pressure on the interest rate, drives away investments in the productive sector and can reduce economic activity”, says Gabriel Barros.

Tax difficulty from 2023

Experts also warn that the PEC will impose fiscal difficulties on whoever takes over the federal government from 2023 onwards.

“One of the most complicated points is that it foresees an increase in spending beyond 2022. It foresees zeroing the Auxílio Brasil queue and sets the value of the benefit at R$ 600. It is a very difficult scenario for any government to change. political cost of, in January 2023, you tell the poorest voters that they will lose this benefit”, says Gabriel Barros.

In André Marques’ assessment, in addition to the political cost of maintaining these expenses imposed by the PEC, there is a practical loss in public accounts. The reasoning, according to him, is simple: if unfunded expenditures are being made now, money will be lacking in the future.

“Whoever wins the elections will have fewer resources to implement the necessary public policies. This scarcity of resources can affect all areas, but especially the most sensitive ones such as education, health and social assistance”, evaluates the economist.

This text was originally published here.