Cecilia Machado: No more promises

The spending ceiling is nothing more than a promise: that public spending will grow in a limited way over a certain period of time. The rule established a gradual adjustment of public accounts by tying spending growth to inflation. And it offered guarantees that it would be maintained over the planned time by being explicitly stated in the Constitution.

It is a fiscal adjustment strategy that works when it is linked to two important pillars: predictability and credibility. It is through this promise that the government’s solvency prospects are improved, with a reduction in risk premiums and interest rates, in a great virtuous circle that stimulates growth, even if the final result of the fiscal adjustment is only seen many years ahead. .

But since the enactment of the PEC (Proposal to Amend the Constitution) of the Precatórios at the end of 2021, we have seen the accelerated use of new PECs to circumvent the constitutional limits defined by the ceiling itself. In a recent example, the PEC of kindnesses (kamikaze), approved last week, endorsed a fiscal expansion of R$ 40 billion outside the ceiling.

One of the two: either we are living in times of extraordinary exceptionality, or we are suspicious of the abusive use of this legislative instrument to violate the tax rules contained in the Constitution.

The problem is that fiscal activism via amendments to the Constitution has broader implications than the mere increase in spending that is authorized by each of the proposals. In a much more relevant way, it represents the end of the possibility of smoothing and temporally deferring new fiscal adjustments that may be necessary.

The indiscriminate use of PECs removes any and all predictability about the evolution of government spending from the basic framework of the functioning of the ceiling.

The new PECs have allowed fiscal expansion whenever political circumstances demand it. There is no guarantee that new PECs will not be proposed in the near future, such as the extension of the PEC of bounties beyond 2022.

We have lost the ability to predict how government spending will behave in the coming years. Its evolution no longer seems to be linked only to inflation.

The ease with which PECs can be approved undermines the credibility of amendments as guarantors of new adjustments.

Unfortunately, we have discovered that strict criteria for changing constitutional norms are not structural and stable parameters of the legislative process. In response to the constraint imposed by the spending ceiling, the procedures for new amendments to the Constitution were trivialized.

The PEC of kindnesses made use of a somewhat dubious state of emergency – the unpredictable rise in fuel prices – in addition to having its processing time accelerated when it was added to another amendment in a more advanced stage of analysis.

If fiscal rules anchored in a constitutional text lose predictability and credibility, what other legislative instrument will be able to make the next government promise a fiscal adjustment in five or ten years to face the increase in spending in the coming years?

Recent experience shows that we will face difficulties with new promises of fiscal adjustment.

Any increases in spending that may be necessary will need to rely on an equivalent increase in revenue, via cash-flow adjustments, such as those established through primary surplus targets.

As a result, all ability to implement an anti-cyclical fiscal policy is lost, since, in general terms, recessive periods, with lower growth and revenue, will need to be accompanied by an equivalent reduction in spending.

The costs of fiscal activism via PEC are much higher and longer lasting than is supposed. A country without words and without commitment to the promises it makes is doomed to be held hostage to the fate of the moment.