Last Saturday (5th), I wrote that in the budget debate for 2023 there is a discussion of a possible waiver of meeting the spending ceiling. It would be a waiver.
On Wednesday (9), Persio Arida recalled that the word waiver is not adequate to characterize what is being discussed. Waiver refers to a temporary increase in spending. What is being debated is a permanent elevation. Thanks to Persio for the correction.
However, if there is a desire for a permanent increase in public spending, it is necessary to simultaneously discuss an increase in the tax burden to finance the permanent increase in expenditure.
In other words, the relevant discussion is not about breaking the spending ceiling. Certainly breaking the spending ceiling is the easiest thing to do. It is worth remembering that the spending ceiling was instituted only because society, through the National Congress, stopped accepting new rounds of tax increases since, at least, 2004.
Let’s get to the numbers. According to the IFI (Independent Fiscal Institution), the primary surplus of the central government adjusted to the economic cycle was, in 2021, 0% of GDP.
As Bolsonaro’s electoral measures are temporary — at the end of 2022, both the Auxílio Brasil of R$ 600 returns to its value of R$ 400 and the PIS/Cofins exemptions end —, most likely the Union’s fiscal deficit adjusted for the cycle and net of Bolsonaro’s attempted embezzlement will repeat in 2022 the same 0% of GDP as in 2021.
For public debt to stabilize, a cyclically adjusted primary surplus of around 2% of GDP is necessary. Consequently, the fiscal gap in 2022 should be on the order of 2% of GDP.
If there is a desire to permanently increase public spending by 1% to 2% of GDP, the fiscal gap will increase to 3% to 4% of GDP, something between R$300 billion and R$400 billion.
In other words, the issue is not the rigidity of the spending ceiling. The theme is how to build a fiscal situation that prevents the return of inflation.
How to raise the tax burden and/or approve reforms that reduce public spending by R$300 billion to R$400 billion?
It is strange that the president-elect and PT political leaders in general do not think day and night about this issue. They behave as if the legitimacy of social spending was enough for the resources to magically appear.
It is important to remember that the National Congress is a partner of the Executive when the latter proposes to increase spending. When the fiscal crisis arrives, the tendency is for Congress to wash its hands and throw it in the Executive’s lap.
The reason is very simple: the voter holds the Executive Branch responsible for the macroeconomic disorganization. There is no incentive for congressmen to bear the costs in their constituencies of approving revenue-raising and spending-reducing measures.
The split society exacerbates this dysfunctionality of our politics.
Thus, I have had a hard time understanding Lula’s “expenditure is life” speech last week. When sitting in the chair of the Planalto Palace, the president will see a fiscal hole of R$ 200 billion. However, Lula has struggled to turn it into a R$300 billion to R$400 billion hole!
On Monday (7), the academy lost Edward Prescott (81 years old), Nobel Prize in Economics. Between 1980 and 2003, Prescott was part of the revolutionary group of researchers in the Department of Economics at the University of Minnesota.
There are numerous contributions by Prescott, but the biggest one, in my opinion, was methodological: he convinced us that macroeconomic models not only help our intuition to understand the phenomena but must be quantifiable.
In this sense, Prescott was a kind of Galileo of macroeconomics.
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