Spending ceiling reform is a goal of all presidential candidates

No matter who wins the presidential election, the spending cap rule (which prevents federal spending from growing beyond inflation) is unlikely to be the same from 2023.

The four presidential candidates with the best performance in electoral polls assess changes in the structure that governs public spending. The general reading is that the ceiling, as it was created, no longer exists.

One of his parents, economist Marcos Mendes, columnist for Sheet, assesses that the rule was efficient in stopping the pressure for spending in the short term. When some unusual demand for resources appeared, it was possible to justify that it did not fit in the ceiling. However, the rule did not withstand changes in power relations.

In Mendes’ assessment, in the last four years there has been a strong deterioration in the political conditions that determine public spending — with Congress gaining power at the expense of the Executive and approving spending increases without establishing sources of revenue, for example.

To make matters worse, he says, President Jair Bolsonaro (PL) has become a partner in fiscal expansionism, weakening those who want to hold back government spending. An example of this was the approval, at the touch of a button, of the PEC (proposed amendment to the Constitution), which opened up space to increase Auxílio Brasil and grant other benefits in the midst of the reelection campaign.

In this aspect, the ceiling is no longer an instrument for anchoring medium and long-term expectations and, according to Mendes, no other spending rule will survive for a long time in this environment.

“It is very difficult to control spending if you don’t change that. In the presidential regime, the Executive has power over the Budget, period. There is no Congress in the world that can include so many amendments and deal with such a level of detail in a Budget like ours. You don’t even see that in parliamentary countries.”

Economist Edmar Bacha, one of the fathers of the Real Plan, and who works in the campaign of presidential candidate Simone Tebet (MDB), identifies another challenge related to the limits of the Budget. He declares himself “horrified” by the content of the 2023 PLOA (Annual Budget Bill).

In his accounts, the primary deficit should be at least 2% of GDP (Gross Domestic Product) in 2023, which represents a result of almost R$200 billion in the red.

Discounting the period of the pandemic, which took the primary deficit to 10% in 2020, the last time a deficit of this size was seen was in 2015 and 2016, respectively of 2% and 2.6%.

“In the budget proposal, they say that they will keep Auxílio Brasil at R$ 600, but put a forecast for R$ 400 in the account. of non-compulsory spending that is unrealistic—simply half of what they spent this year,” says Bacha. “The government cannot function with the money forecast that is there. It will have to be withdrawn from Congress and redone by December 31.”

The leader in the polls, former president Luiz Inácio Lula da Silva (PT), was the first to make it clear that he will abolish the spending cap, considered too restrictive, especially for social policy.

“We are going to remove the ceiling that is there and build a new fiscal framework”, says economist Guilherme Mello, one of those responsible for the PT’s government program. “We presented the guidelines in the program, but the new rule for the fiscal will have to be negotiated because any change depends on a PEC and a greater debate with society and Congress.”

Lula’s government program also works with the prospect of reviewing the limits of the LRF (Fiscal Responsibility Law, which establishes rules for the planning, control, transparency of public spending) and the so-called Golden Rule (which prohibits indebtedness for pay current expenses such as salaries and pensions).

In internal discussions, there are those who defend a real growth target for primary spending, letting the primary result fluctuate within a certain range — in a similar way to inflation targeting. Specific targets for growth in investment spending, health, education, payroll, among other items, have also been discussed.

There are also those who consider establishing the possibility of deducting some expenses from the primary result target (revenue account minus expenses that the government must pursue annually), as was the case in the PT period with the investments of the PAC (Plan for Acceleration of Growth).

There is a certain consensus that, whatever the short-term rule, it is recommended that it consider long-term scenarios for the evolution of net and gross debt.

Economist Nelson Barbosa, columnist for Sheet and former Minister of Finance and Planning, is not part of the groups that prepare the program, but is among the PT members who defend the need for some rule to control spending.

“Predictability, transparency and efficiency recommend spending growth targets”, says Barbosa. “Signaling the evolution of spending, even if it is to increase it, avoids a race to create revenue, stimulates the debate on the efficiency of the allocation of public resources and avoids pro-cyclical fiscal policy, which ends up destabilizing rather than stabilizing the economy. “

In Bolsonarista management, there is no talk of giving up the ceiling, but Bolsonaro himself has already given an interview saying that the rule can be changed in a possible second term. Minister Paulo Guedes has also declared that the current rule has imperfections and needs to be improved.

A recurring example of a problem cited by Guedes is the case of transfer of rights. The Union understood that it would have to transfer part of the gains to states and municipalities. Despite being a punctual transfer, it was vetoed by the ceiling. The first change to the rule was then made, through a PEC.

At the end of August, the National Treasury announced that it had already discussed a new model of spending control, considered more flexible, as detailed in the Sheet. Expenditure could grow more depending on the level of indebtedness and GDP.

Expenditure growth could exceed inflation when the debt was below a certain level as long as the percentage above the IPCA (Extended National Consumer Price Index) was below GDP growth.

The summit of the Ministry of Economy talks about a system of targets for indebtedness. No official figures were presented, but those involved in the discussions even mention that the objective would be to bring Brazilian indebtedness closer to the level of emerging countries — around 60% of GDP. Today, gross debt represents 77.6% of GDP.

Former minister Ciro Gomes (PDT) is another presidential candidate who speaks openly about revoking the current ceiling. In the most recent demonstration, on Friday (9), he mentioned that the revision of the rule would benefit education.

Economist Nelson Marconi, who is coordinating the government program, says that a cap rule for spending associated with GDP is being studied.

“As it stands, the ceiling has become a work of fiction,” says Marconi. “We are evaluating a rule that includes an additional in addition to inflation, linked to GDP, but with a countercyclical character.” In other words, it allows for an increase in spending in times of economic downturn, especially so that the State can have an efficient social policy in more critical periods.

What is certain, so far, is that investment will be left out of this new spending control rule.

“We understand that investments need to be excluded from the ceiling, because this expenditure has a multiplier effect on the economy, helping to improve productivity and reduce social inequalities”, says Marconi.

Current expenditures would be linked to GDP, with more limited growth. Investments, on the other hand, would be corrected based on the real expansion of federal revenue, which would provide a greater expansion, since, normally, revenue grows more than GDP.

Tebet’s economic team also intends to make changes to the ceiling rule, but to rescue it.

“The importance of the ceiling in controlling expenditure is undeniable. We saw how important it was to bring the interest rate down from two to single digits and to reduce inflation”, says economist Elena Landau, coordinator of Tebet’s economic program.

“We need to make it very clear that any flexibilization of spending must be linked to gains from reforms, and it’s not that reform for the guy to say he did it because he’s liberal, he’s fiscal, but that reform that generates resources for the green economy, for new technologies, for the recovery of learning and appreciation of the teacher.”

In Tebet’s group, the ceiling discussion is part of a larger debate that seeks to reorganize the budget structure. Each and every economy, says Landau, will be channeled to education, health, science and technology, considered the foundations of sustainable long-term growth.

WHAT IS THE EXPENSE CEILING?

Rule that limits federal government expenditures to the IPCA (official inflation index) of the previous year. Initially, the IPCA was applied for the 12 months ending in June. The rule was changed and started to consider the IPCA from January to December. As the budget proposal is sent before the official IPCA for the year is released, part of the adjustment is a projection of the IPCA

WHAT’S UNDER THE ROOF

Mandatory public expenditures (such as salaries) and discretionary expenses, which can be cut (such as investments). Both are part of the so-called primary expense (that which does not consider interest expenses)

WHAT IS OUTSIDE THE CEILING

Financial expenses, such as the payment of interest on the public debt, extraordinary credits (released, for example, in situations of calamity), constitutional transfers to states, municipalities and the Federal District, capitalization of state-owned companies, expenses with Electoral Justice elections and complementation of Fundeb (Basic Education Maintenance and Development Fund)