Economy studies new rule that makes spending ceiling flexible

The technical staff of the Ministry of Economy prepares the design of a new rule for public accounts that makes the spending ceiling flexible (which prevents federal expenses from growing above inflation). The measure promotes a structural change in the constitutional norm, created in 2016.

Participants in the discussions report to the Sheet that the proposal should be completed this month to be delivered to Minister Paulo Guedes (Economy). Afterwards, it should also be debated together with economists outside the government.

The new rule allows federal spending to grow above inflation if federal indebtedness is below a certain threshold. Currently, the ceiling prevents the advance of spending above the IPCA (Broad Consumer Price Index).

Instead of the ceiling being the inflation index, a relief in the debt situation would allow an expansion corresponding to the IPCA plus a percentage. The “extra” percentage has not yet been fixed, but the idea would be not to exceed the potential growth of GDP (Gross Domestic Product) in the long term — seen as something between 2% and 2.5%.

The technicians see one of the objectives of the rule as bringing Brazil closer to the level of indebtedness of other emerging countries – a level that would be around 60% of GDP.

According to the mechanism studied, if indebtedness increases again and exceeds a certain level, real expenditure growth would be more limited. If the fiscal scenario continues to deteriorate and so does indebtedness, expenses would once again be limited to the IPCA (in practice, the traditional ceiling would come into effect again).

The issue should be discussed in more depth after the elections, regardless of who wins the dispute for the Planalto Palace. The change is defended internally as a state policy – ​​not a government policy.

One of the main challenges at the moment is to gather consensus on which indebtedness indicator will be used as a trigger for the mechanism, since public accounting allows the use of different methodologies to assess the situation.

A reference used by technicians is that the Brazilian gross debt cannot exceed 80% of GDP (Gross Domestic Product) – since, from that point on, the interest rates charged to the National Treasury by investors start to get very high, deteriorating the economic framework and hampering the efficiency of different public policies. Therefore, flexibility would only be possible below this level.

A lower indebtedness than this is already observed in the numbers, which facilitates the activation of the rule in the short term. The gross debt of the federal government, states and municipalities is currently at 78.2% of GDP (also the official projection for the end of the year).

The indicator reached a record level at the height of the Covid-19 economic crisis, when it represented 88.6% of GDP and generated explosive projections for future indebtedness, but later fell with the resumption of activity and GDP.

Using the average debt of emerging countries as a reference, a real growth in expenses would be allowed when indebtedness was between 60% and 80%, for example.

The technicians point out that the numbers used and the parameters are not definitive and can be changed during the debate by the government and Congress.

Discussions on the new fiscal anchor aim to regulate constitutional amendment 109, enacted in March 2021 and the result of discussions on the Emergency PEC (Proposed Amendment to the Constitution). The text requires a supplementary law on debt sustainability, specifying calculation indicators, adjustment measures and even planning for the sale of assets for its reduction.

But, as this implementation will require changes to the ceiling rule (which is in the Constitution), the discussions should demand a PEC.

The new mechanism will allow for an extra release of resources while public accounts are at a more comfortable level and without threatening the public debt. The measure would have a positive impact on the assessment made by risk rating agencies, but experts say it would mainly benefit the Brazilian economic environment by making fiscal and monetary policies more efficient.

The constitutional amendment to the spending ceiling completed five years at the end of 2021, going through the most critical moment since its creation, after different gaps and changes led by the Jair Bolsonaro (PL) government and amid the challenges of candidates for the Presidency.

Considered by investors to be the most important reference to guide expectations about public accounts in the country during most of the last few years, the standard was significantly changed through the PEC dos Precatórios in 2021.

Arguments in favor of change vary and range from the view that public investments are strangled to the analysis that the current rule no longer inspires confidence among investors.

Criticism also comes from Guedes, whose liberal principles in theory combine with a rule that limits the size of the state. “There are concepts that are wrong, but if you say that you are going to move the ceiling, that’s it. It ends up creating instability and the dollar rises,” he said at the end of last year.

First placed in the polls for the presidency, Luiz Inácio Lula da Silva (PT) has already publicly defended the tearing down of the ceiling. “There will be no spending cap in my government. Not that I will be irresponsible, spend to indebted the nation’s future. It will have to spend on what is necessary,” he said.

His advisers, however, advocate a new rule – not simply eliminating the ceiling.

Bolsonaro expressed a desire to review the expense limitation rule. “Last year, we had an excess of revenue, more revenue, in the region of R$ 300 billion. You cannot use a penny of that in the infrastructure given the constitutional amendment of the ceiling back there. something will be changed. We will leave it for the future, [para] after the elections to discuss this issue,” he said in a radio interview in April.