Government plans to link new spending cap to annual GDP, with spending free in recessions

The Ministry of Economy’s proposal to reformulate the spending ceiling intends to authorize the real growth of expenses (above inflation) on a permanent basis and linked to the growth of GDP (Gross Domestic Product). The magnitude of the increase, however, will depend on the level of public debt.

The rule provides that, in times of economic recession, the size of the drop in GDP would serve as a reference to authorize temporary extra-ceiling spending to mitigate the negative effects on the economy.

The preliminary design, hitherto unpublished, was detailed this Friday (16) by the head of the Ministry’s Special Advisory for Economic Studies, Rogério Boueri, in a debate promoted by UnB (University of Brasília). The report of Sheet accompanied the presentation.

The parameters used in the proposal indicate that the government would have an immediate expansion in its space to spend in 2023 – as intended by President Jair Bolsonaro (PL) and Minister Paulo Guedes (Economy).

The Chief Executive has been under strong pressure after submitting a proposal for a Budget for 2023, failing to provide for a series of expenses, such as the amount needed to pay the minimum Auxílio Brasil of R$ 600 promised in his campaign, given the restriction of the current design of the ceiling —corrected only for previous year’s inflation.

The drastic cuts in resources from programs such as Farmácia Popular, Mais Médicos and to fund the operation of assistance centers that operate the social registers also had strong negative repercussions.

Guedes and Bolsonaro have promised to recompose these expenses. Opposing campaigns, in turn, have used the cuts as a factor of attrition against the president and mention the need to relax fiscal rules in 2023 to avoid social problems.

The proposal presented this Friday may still undergo modifications, since its viability is being “tested” by members of the Ministry of Economy.

According to Boueri’s presentation, if the gross debt is below 60% of GDP, the increase in the ceiling would be inflation plus the previous year’s GDP variation, discounted by 1 percentage point. For example, if the economy grew by 3% in the year, the ceiling would have a real expansion of 2% in the following year.

In a situation of gross debt between 60% and 80% of GDP, the rule would be stricter: the expenditure limit would be adjusted for inflation, plus an amount equivalent to the previous year’s GDP change minus 2 percentage points. In practice, therefore, the real expansion of the ceiling would only occur with economic growth above 2%.

In July, gross debt represented 77.6% of GDP, which indicates that the second rule would apply to the Budget next year. As the government itself projects a 2.7% increase in activity this year (above the stipulated 2% trigger), the new ceiling, if approved, would allow an expansion equivalent to 0.7% of GDP in 2023.

If the debt exceeds 80% of GDP, the trigger that allows spending growth above inflation would be suspended, and the spending limit would be limited to inflation (as the ceiling works today).

In a context of recession, the government may temporarily increase expenditures, outside the ceiling, regardless of the level of indebtedness.

The idea is that the license to spend is equivalent to the size of the recession: if the drop in GDP is 1%, for example, the extra-ceiling valve will also be 1% of GDP. According to Boueri, a sequence of two negative quarters (configuring the so-called technical recession) would be enough to authorize the opening of extraordinary credit.

The government could also trigger a kind of escape clause if it manages to move forward with privatizations, concessions or reforms. The new rule authorizes an extra expense equivalent to 50% of the money raised with privatization or the savings obtained with the measures.

This increase in the ceiling would be temporary and in installments, over a period that could be five years, for example. Of this amount, half would be destined for income transfers, and the rest for investments. The other 50% would reduce public debt.

Any space resulting from the expansion of the ceiling above inflation, temporarily or permanently, could only be allocated to discretionary spending, that is, investments, funding for the public machine or “social dividends” (a kind of temporary bonus for low-income families ). Use to create permanent expenses, such as salary increases or the creation of new continuing benefits, would be prohibited.

The changes would allow the government to unburden areas that are currently quite compressed, while ensuring a gradual flexibilization of the Budget, as discretionary spending (which pays for funding and investments) account for a larger share. In the current proposal for 2023, mandatory expenditures account for 93.7%.

“The proposal increases the share of untied spending, to give time to make the necessary reforms,” ​​said Boueri.

The proposal, according to the advisor, is an attempt to expand the possibilities of flexibilizing the ceiling, but with “clear rules” and in an organized manner. “What we’re thinking about are escape clauses for extra-ceiling spending that aren’t as discretionary,” the special adviser said, referring to political pressures that build from time to time for a spending expansion, taking away the predictability and credibility of policy. Supervisor.

Since 2021, four constitutional amendments have been enacted to create space in the Budget for measures with popular appeal, such as the expansion of Auxílio Brasil and the creation of temporary benefits for taxi drivers and truck drivers. The most recent was approved on the eve of the election campaign. The balance of these measures is close to R$ 200 billion in additional expenses in the two years.

Boueri also said that the design is being prepared based on a diagnosis that the current rule does not have a countercyclical mechanism (to mitigate the effects of an economic recession, for example). This view was questioned by economist Marcos Mendes, a researcher at Insper, a columnist for Sheet and one of the creators of the spending cap.

Present at the UnB event, Mendes stated that the possibility of editing extraordinary credits in unforeseen or calamity situations, allowing for out-of-ceiling expenses, already works as a countercyclical component.

Another problem mentioned by Boueri was the fall in the ratio of expenditures as a proportion of GDP, which occurs at a faster pace than the government’s ability to pass adjustment measures in the National Congress. “We reformed, but not at the speed required to frame spending without subterfuge,” he said.

“If it were up to me, we would hold the current ceiling. The suggestion here is simply because it will hardly be maintained, and depending on what we do, it will implode, a ‘waiver’ will come. [autorização temporária para gasto] and that’s it”, said the advisor. In his assessment, the proposal preserves elements of the original spending ceiling, which no longer has “political conditions” to be maintained.

Commenting on the presentation, Mendes expressed concern about the risk that the design could result in a simple expansion of the expenditure ceiling, without reviewing expenses that already exist and are considered inefficient. “I don’t say that [o desenho] doesn’t hold up, but we could be heading for a new serious fiscal problem,” he said.