Treasury proposes flexible spending ceiling, with extra expansion linked to public debt level

The National Treasury released this Monday (14) its proposal for a more flexible spending ceiling rule, which allows real expenditure growth according to the level and trajectory of the public debt. The rule also grants a bonus in case of an improvement in the surplus on the accounts.

A discussion text signed by eight technicians from the agency presents the pillars of the new rule, which would continue to have an expense limit as the main anchor. The proposal was brought forward by the Sheet in September this year.

The publication of the text by the Treasury takes place at a time when the team of the president-elect, Luiz Inácio Lula da Silva (PT), discusses the so-called PEC (proposed amendment to the Constitution) of Transition, which seeks to remove from the scope of the spending ceiling the expense with Auxílio Brasil (which would be renamed Bolsa Família).

The possibility of spending R$ 175 billion outside the ceiling, for four years or even permanently, scared financial market agents, who fear a significant worsening of the accounts and a lack of control in the public debt. The value could reach R$ 198 billion, if the idea of ​​funding investments with extraordinary income takes hold.

In recent days, discussions around the PEC and Lula’s speech criticizing the spending cap have caused nervousness in the market, raising interest rates – which serve as a benchmark for the cost of financing Brazil when issuing debt bonds.

The National Treasury’s proposal, which began to be elaborated before the elections, seeks to contribute with an alternative to the discussion of reformulating the rules.

The design suggested by the agency 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.

In the case of indebtedness, the technicians chose the DLGG (net debt of the general government) as a reference. 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 rate would be fixed every two years.

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.

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). This review would be annual.

The bonus mechanism, according to the Treasury, allows a ruler to be “rewarded or punished” within his term of office for his conduct of accounts. Faced with a deterioration, the chief executive would be forced to contain expenses. On the other hand, an improvement would authorize him to spend more.

The rule would not come into force in 2023, a critical year in view of the repressed spending bill – such as the BRL 52 billion needed to ensure the continuity of the BRL 600 floor for Auxílio Brasil families and the BRL 18 billion to pay for the installment. extra R$ 150 per child up to six years old. The proposal does not detail how this impasse would be resolved.

The suggestion is that the rule starts to take effect in 2024. In the first year of validity, the variation of 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. Considering the ceiling provided for in the 2023 Budget proposal, this would represent an additional BRL 34.4 billion for the Executive Branch.

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 Treasury also proposes to maintain an expenditure limit as it considers this a rule in line with modern fiscal rule standards. The text cites a survey by the IMF (International Monetary Fund), according to which at least three quarters of advanced economies had spending rules in 2021.

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 Treasury also presented discussion points, which are not formally contemplated in the proposal, but are considered relevant by the body.

One of them, as anticipated by the Sheet, is the extinction of the ceiling for payment of court judgments (precatories), which would once again be done in full. Another is the possibility of stipulating stricter limits for other Powers, such as the Judiciary and the Legislative, which have expenses concentrated on salaries and the hiring of civil servants — therefore, they would not need to have the same growth as the Executive, responsible for implementing public policies.

A third point raised by the technicians is the possibility of treating “green public investment”, aimed at environmental or climate issues, as an exception to the ceiling.

“The discussion was also brought up by the IMF, which proposes the creation of a climate investment fund for the European bloc. Also, from the revenue point of view, the fiscal framework could be adjusted in such a way that different sources of financing, such as international donations, carbon market or green bonds [títulos verdes] could be processed in the Budget and align themselves with a proposal for medium and long-term fiscal sustainability”, says the text.