Change in the ceiling under discussion in the government is criticized by economists

The proposal by technicians from the Ministry of Economy to make the spending ceiling more flexible inserted the Jair Bolsonaro government (PL) into the debate already underway in academia, the financial market and presidential campaigns on the need to review the current fiscal rule. The chosen path, however, is not a consensus.

A number of economists criticize a fiscal framework that uses public debt indicators as a reference to determine the pace of expenditure growth, as proposed by the National Treasury.

In addition, there is the assessment that a huge effort will be needed to restore the credibility of fiscal policy and ensure that any new rule is complied with without subterfuge and dribbling.

as showed the Sheettechnicians from the economic team intend to present to Minister Paulo Guedes (Economy), by the end of the month, the design of a rule that makes the spending ceiling flexible (currently corrected only by inflation), allowing an increase in expenses that corresponds to the IPCA plus a percentage if public debt falls below a certain level — which could be 80% of GDP (Gross Domestic Product).

Gross debt is currently at 78.2% of GDP, indicating that, if this is the chosen benchmark and the proposal goes ahead, the new mandate starting in 2023 could already increase spending above inflation.

This is a key point for discussing the course of fiscal policy in the country. Both Bolsonaro and former president Luiz Inácio Lula da Silva (PT), the candidate who leads the polls, promise to maintain the R$600 minimum for beneficiaries of Auxílio Brasil, currently scheduled to run until the end of 2022. The current ceiling design, however, does not support this change.

There are also other repressed expenses, such as readjustments for public servants (part of the careers have been frozen since 2017), investments and precatories (judicial debts that had their payment postponed in a recent change in the ceiling).

Therefore, the flexibility of the expenditure limit is taken for granted by many economists and financial market agents, although the formula is still unknown.

There are economists who defend an authorization for extra spending for 2023, with a defined value, while a new structural fiscal rule is discussed. This view finds support even among some interlocutors in Lula’s campaign, although the former president has spoken of bringing down the roof.

The Treasury technicians’ proposal, on the other hand, maintains the ceiling and uses the debt indicator as a reference to allow an acceleration of spending when there is a fall, or to force a brake on expenses when indebtedness rises.

Gabriel Leal de Barros, partner of the manager Ryo Asset and former director of the Senate’s IFI (Independent Fiscal Institution), criticizes the government’s proposal and says that European countries, for years adept at debt rules as the main instrument for controlling fiscal policy , now discuss their abandonment in the face of the diagnosis that they did not prove to be credible — especially in the context of the pandemic, when it was necessary to expand spending.

One of the problems with this type of rule is that, when the debt goes up, it can take longer to fall, and this would hold up fiscal policy for longer.

“What the government has direct control over is spending, and a credible rule needs to be about primary spending. [sem incluir o serviço da dívida pública]”, says Barros. For him, the Swedish model can be a reference, with a general ceiling and individual growth limits for some expenses (as if they were sub-ceilings). The economist defends that the general ceiling is corrected by the inflation target some percentage.

For Caio Megale, chief economist at XP Investimentos and former advisor to the Ministry of Economy, a rule having debt as a reference would be advantageous because “aim at what really matters”, which is the trajectory of the country’s indebtedness. However, he recognizes that the new rule may increase the complexity of tax rules, since it alone does not explain which instruments will be adopted to achieve the objective. “It is more complex to calibrate spending to reach a debt level, it also depends on revenue.”

According to Megale, there is a pent-up demand for spending that can be resolved with a package to allow for a new R$200 billion expansion next year. “There’s no escaping the Auxílio Brasil of R$ 600, it’s even socially desirable. That’s why this new displacement [no teto]”, he says. From 2024, however, the ceiling would be corrected for inflation, with some gaps in case of very significant growth in collection.

One of the creators of the ceiling rule, economist Marcos Mendes, columnist for Sheetsays the Treasury’s proposal is in line with more recent discussions on fiscal rules and is “technically sound”, but has reservations about its execution.

“The devil lives in the details. A good idea can be poorly implemented. It is necessary to see the complete description of each proposal to evaluate”, he says. “In a country where the tax rule changes in a week, this opens the door to some kind of maneuver or creative accounting.”

According to him, when placing a debt indicator as a gateway to a flexible ceiling, the risk is that there will be maneuvers to manipulate this indicator or “discount” expenses, as happened in the past with the limits on personnel expenses in states and municipalities, provided for in the LRF (Fiscal Responsibility Law) and which were successively made up.

Mendes warns that this would enable politicians to circumvent the rules without having to bear the political cost of an explicit repeal of the ceiling.

Other economists critical of a rule based on debt indicators, heard privately by the report, say that opting for this path would be like treating the symptoms, but not the disease. This is because indebtedness can rise for different reasons: drop in collection, high spending, high interest rates or low growth.

In addition, debt typically grows in a recession and is sometimes slow to fall. This would make the rule suggested by the Treasury a factor in strengthening the economic cycle — contracting spending at a time of slowdown and allowing expansion in phases where there is already growth.

The economists heard by the Sheet emphasize that any new rule must be accompanied by a firm commitment that it will be complied with.

The loss of credibility of fiscal policy reflects the speed and ease with which the Constitution has been amended to allow for more spending at the whim of political desires.

In the last 17 months, four constitutional amendments were enacted authorizing the expansion of spending – the last one discussed and approved by the House and Senate in less than a month, opening public coffers to pour up to R$42 billion in aid on the eve of the election.

Precisely because it changes the country’s maximum legislation, a PEC (proposed amendment to the Constitution) requires a qualified quorum for its approval: 308 of the 513 deputies and 49 of the 81 senators. But this barrier has been overcome with increasing ease, which has eroded the shield provided by this instrument.

“This is the fault of Congress, which destroyed the technology of the spending cap. If even what is in the Federal Constitution is not guaranteed, there is uncertainty”, evaluates Barros. He also argues that any change in the spending rule should be accompanied by an indication of reforms, to ensure a sustainable debt trajectory.