Treasury proposes new spending cap on extra expansion if accounts close in the blue

The National Treasury’s proposal for a more flexible spending ceiling rule calls for the expenditure growth rate to be defined every two years, according to the level and trajectory of the public debt. The rule also grants a bonus in case of an improvement in the surplus in public accounts.

THE Sheet had access to the preliminary proposal, which has been presented to people outside the government in the hope of collecting impressions and possible suggestions for improvement.

This is a different rule from the one presented on 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).

In the initial design of the Treasury, the rule would not necessarily come into force in 2023, a critical year in view of the repressed spending bill – such as the BRL 52.5 billion needed to ensure the continuity of the BRL 600 floor for Auxílio Brasil families ( pledge of the main candidates for the presidency). The proposal does not detail how this impasse would be resolved.

The rule is expected to come into effect in 2024. In the first year of validity, the variation in expenses will follow the rule linked to the debt, but will also have a one-time surcharge of 2% to reduce the pressure on the cost of the public machine and the investments – today quite compressed.

The 2% increment would only apply to the first year and is seen behind the scenes as an incentive to broaden the acceptance of the new rule within the political class.

The proposal is anchored in three main elements: expenditure, debt and primary result. The spending limit will always be corrected at least for inflation (as it is today), but there is a possibility of an additional one depending on the level and trajectory of these indicators.

As a reference, the technicians chose the DLGG (net debt of general government). It includes the federal government, states and municipalities – but, unlike other better-known indicators (such as gross debt or net public sector debt, the DLSP), it excludes state debt and government bonds used by the Central Bank to make its policy of fees.

The main objective of choosing this indicator is to ensure that fluctuations in the spending ceiling have to do with strictly fiscal reasons, without interference from the Central Bank’s activities in the market or artifices such as the sale of international reserves.

The DLGG would not be a target, but a reference to indicate what the maximum real growth of expenditure will be in the following periods.

The mechanism uses the previous year’s average net debt as a benchmark. It will be compared to the average of the two previous years, to see if the indicator is falling or rising. An example contained in the Treasury proposal helps to better illustrate how it works.

In 2023, the president-elect would define, in his first year in office, the real growth rate of the expenditure cap in 2024 and 2025. For this, it will be necessary to look at the average DLGG for 2022 and compare it to the average for 2020 and 2021 .

If the diagnosis is of debt reduction, the real growth in expenditure could range from 0.5% to 2%. In the opposite direction, if the trajectory is upward, the advance of spending above inflation will be between 0% and 1%.

What will determine the percentage to be applied is the level of debt. A DLGG above 55% of GDP will require the government to contain more spending (ie, growth will remain at the minimum allowed).

Between 45% and 55%, the pace of expansion of expenses will be at an intermediate level. Below 45%, the government will be able to take advantage of the maximum permitted elevation.

In the last two cases, even if the debt is increasing, the possibility of increasing expenditures above inflation remains, but at a slower rate than would be observed in a more favorable fiscal situation.

In 2022 through July, the average indicator of the DLGG is at 59.4% of GDP, according to data from the Central Bank. The value is lower than the average of 63.3% of GDP observed between 2020 and 2021, suggesting that the real growth trigger of the ceiling would be triggered in the first year of the new rule.

The pace of expansion of the expenditure limit can still earn a bonus of 0.5 percentage point (equivalent today to around R$ 8 billion) whenever the accounts are in the black and on an improvement path. To verify whether the government will be entitled to this extra, it will be necessary to analyze the primary result (difference between revenues and expenditures, excluding interest on the debt).

The rule is to calculate the average result of the two years before the ceiling was fixed. If it is positive and higher than the average of the previous biennium, the bonus is awarded.

For example, the government in 2023 will look at the average of the central government’s primary result (which includes the Treasury, Social Security and Central Bank) for the years 2021 and 2022 and compare it to the average of 2019 and 2020. If there is a surplus and it is increasing, the bonus applies. If the result is positive but decreasing, there is no surcharge.

There is one exception: when the fiscal effort is already above 1.5% of GDP, the bonus is applied regardless of improvement in this number.

When drawing up the design of the proposal, the Treasury started from some premises. For the agency, the trajectory of the debt is as important as its level, as it indicates the sustainability of the country’s accounts.

Furthermore, the logic of forecasting different growth rates of expenditures, depending on the fiscal scenario, provides some flexibility, at the same time as it helps to stop spending impulses in times of good (not always lasting). The limited pace of growth would help to maintain a relatively stable level of expenditure in relation to GDP.

Also according to the Treasury, setting it every two years also helps to maintain a government’s ability to respond to economic conditions. The escape valve of extraordinary credit, for urgent and unforeseen expenses or in calamities, would continue to be valid.

The integration of the rule into the primary result, in turn, can help to reduce or control tax expenditures and exemptions, as these measures reduce collections and worsen the primary – jeopardizing the additional growth bonus of the ceiling.

One innovation is the extinction of the so-called contingency, when ministries’ expenses are blocked to ensure the fiscal target due to a frustration in collection. This instrument is criticized because it affects the good planning of agencies, which are often blocked throughout the year and receive the green light to spend in recent months, generating a rush that does not always preserve the quality of expenditure.

However, if the government fails to meet the primary result target, it will need to present a public justification – just like the president of the Central Bank needs to do when the inflation target is exceeded.

The National Treasury also admits, in the preliminary proposal, a discussion on what will be the composition of expenditure subject to the spending ceiling and says, in the document, that it “may be different from the current one”.

Today, all primary expenditure is below the limit, except spending on transfers to states and municipalities, Fundeb (fund for basic education), contributions to non-dependent state-owned companies, extraordinary credits and expenses with the Electoral Justice to carry out the elections. There are economists who defend the exclusion of investments in infrastructure, for example.

In formulating the proposal, the body’s technicians focused the choice of parameters on data already performed, that is, already measured and which are not mere projections. The assessment is that this favors the predictability of the trajectory of public spending, since everyone will know the information (estimates, in turn, may vary).

The Treasury itself, however, recognizes that this option may end up delaying the triggering of the trigger that authorizes a greater expansion of spending, since the fiscal improvement will take time to be captured by the rule.

UNDERSTAND THE FISCAL RULES UNDER DISCUSSION

• National Treasury proposal: Authorize a real increase in the spending ceiling, above inflation, at rates defined according to the level and trajectory of the general government’s net debt. In addition, the existence of a positive primary result (signaling higher revenues than expenditures) and growing entitles the government to a kind of bonus in the expansion of expenditures.
• Proposal of the SPE (Secretariat of Economic Policy): Authorize a real and permanent increase in the expenditure ceiling, above inflation, according to the pace of GDP growth. The trigger to allow this expansion would be the gross debt of the general government (which bonds used by the BC in its interest rate policy). In recessions, government would be allowed to temporarily increase off-ceiling spending.
• PT’s proposal: the campaign of ex-president Luiz Inácio Lula da Silva (PT) has not yet presented a concrete proposal, but economists who advise the party are discussing possible formulations. Options include keeping only a primary result rule, as it was before the spending cap, or setting a more flexible spending cap, with expansion above inflation and possible exceptions for certain spending, such as investments.