Transition PEC: 4 points to understand Lula’s plan to keep Brazil Aid at R$ 600

The government of president-elect Luiz Inácio Lula da Silva (PT) has not really started yet, but a good part of his team of articulators and political negotiators is spending the last few days approving the so-called Transition PEC.

This is the nickname of the PEC (Proposed Amendment to the Constitution) that the new government wants to approve later this year to guarantee, among other things, the maintenance of the value of R$ 600 of the Brazil Aid in 2023. Estimates indicate that this could cost R$ $175 billion a year.

The PEC is considered important for the next government because the 2023 budget was delivered by the team of the current president, Jair Bolsonaro (PL), and does not provide for the payment of BRL 600 in aid.

As the value was a promise by Lula (and also by Bolsonaro) throughout the electoral race, the PT’s team mobilized to find ways to fulfill the promise.

But what exactly is this PEC? Why does the new government want to amend the Constitution even before taking charge of the country? And what are the impacts of this measure on public accounts?

BBC News Brasil spoke with economists to respond to four points about the Transition PEC. Check out:

What is the Transition PEC?

The Transition PEC is the nickname given to a proposed amendment to the Constitution that is being negotiated by members of the new government with the National Congress.

The text has not yet been formally presented to Parliament. This should only take place on Thursday (17th), but leaders of the new government have said that it foresees a change in the Constitution so that expenses with the Auxílio Brasil can be outside the spending cap rule.

The spending cap was approved in 2016, during the management of then-President Michel Temer (MDB). It foresees that government expenses can only increase based on the correction for inflation calculated by the IPCA (Extended Consumer Price Index).

According to politicians such as Senator-elect Wellington Dias (PT-PI), one of the main articulators of the Transition PEC, if the measure is approved, spending on Auxílio Brasil would be outside the ceiling rule, which would give Lula’s administration the possibility of increasing expenses in the payment of the benefit and reaching the amount of R$ 600.

How will this money be used?

In an interview with CNN Brasil this Monday (14), Senator Dias said that the money provided for by the PEC would be spent on the payment of the Brazilian Aid of R$ 600 and a bonus of R$ 150 per child up to six years old. in the families that receive the benefit.

“The proposal presented is a value relative to what is necessary for emergency aid […] There are BRL 157 billion and another BRL 18 billion for aid of BRL 150 per child”, said the senator.

The executive director of iFI (Instituição Fiscal Independente), Daniel Couri, told BBC News Brasil that the Transition PEC also allows the new government to expand its spending in other areas considered important.

This would happen because, by removing the expenses of the Brazil Aid from those subject to the ceiling, a margin of R$ 105 billion would be opened (estimated value of the Brazil Aid of R$ 405) already foreseen in the budget sent by the Bolsonaro government for the Lula government to spend with other programs.

“It is still not clear in which areas the government will want to spend this money, but there are signs that the government wants to spend it on programs such as Popular Pharmacy, indigenous health, resumption of works and housing policies”, said Couri.

Why off the ceiling?

The attempt to approve the Transition PEC happens, among other reasons, because the budget proposal sent by the Bolsonaro government for the year 2023 did not provide for sufficient amounts for the payment of R$ 600 per family that receives the benefit.

“The budget sent provided for around BRL 105 billion for Auxílio Brasil, which was related to the amount of BRL 405 per benefit. included in the budget”, said Daniel Couri.

“Even if the winner of the elections was Bolsonaro, we would have to be discussing a PEC like this to guarantee the payment of the Auxílio Brasil at the level that was promised”, says Carla Beni, economist and professor at FGV (Fundação Getúlio Vargas).

Throughout the first days of the transition between governments, there were doubts about whether the PEC would be the best legal mechanism to execute this budgetary operation.

Doubt existed because, to enter into force, a PEC needs to be approved in two rounds by the House and the Senate with three-fifths of the votes in both Houses.

Another possibility studied was the issuing of a Provisional Measure right at the beginning of the new Lula government opening an extraordinary credit in the budget to complement the benefit.

In recent days, however, the idea has lost steam due to the risk that the measure could be challenged in court and give rise to accusations of violation of the LRF (Fiscal Responsibility Law).

The understanding of Lula’s economic and political team is that the PEC, despite being more difficult from a political point of view, would offer greater legal security to the new government.

What are the risks?

In the evaluation of professor Carla Beni, the main risk surrounding the Transition PEC is related to uncertainty about how this expansion of expenses will be paid for. According to her, the new government has not yet made it clear what plans it has for rebalancing public accounts.

“The government has not yet said how this debt will be financed. It is not clear where the money will come from to pay these expenses. It is not known, for example, if it will be based on a new tax reform, if we will cut exemptions that can increase tax collection,” he told BBC News Brasil.

Another point of uncertainty in relation to the PEC is related to the length of time that the expenses with the Brazil Aid would remain outside the ceiling. Initially, the proposal provided that these expenditures of BRL 175 billion outside the limit would only be valid for the year 2023. Now, there are suggestions for it to be valid for the four of Lula’s new term.

Carla Beni says that if the measure is valid for just one year, the risks for the deterioration of public accounts would not be great. She points out, however, that if the approved proposal is valid for four years, the risk of negative impacts on the Union’s finances is great.

“If it’s valid for one year, I don’t think there are big risks. But if it’s going to be valid for four years and if the government doesn’t recompose its revenues by reviewing exemptions, pointing out new sources of revenue, then that could affect, yes, our degree of indebtedness”, said the teacher.

Daniel Couri, from IFI, follows the same line as Carla Beni. According to him, the tension shown by the market in relation to the implementation of the Transition PEC is the result of doubts about how the government intends to pay the bill.

“The market tension is not so much related to Bolsa Família [antigo nome do Auxílio Brasil] because both candidates promised to increase it to 2023. The tension and concern are more due to the size of the increase in expenses and the uncertainty about how to finance it in the coming years”, said Couri.

Couri and Carla Beni claim that if the government does not rebalance the accounts in the coming years, the benefits desired by Lula’s team for the poorest populations could be reduced.

“If there is no recomposition of revenues, the government will have to issue debt securities to finance itself. This puts the government in a fragile situation in case of some external shock, for example. In a crisis, this fragility in public accounts can, including compromising the advances that one wants with the poorest”, said Couri.

On CNN Brasil, Wellington Dias tried to reassure the market.

“We want to work with a lot of fiscal responsibility. Fiscal responsibility has already been practiced by the president-elect […] The essence is to fulfill the responsibility […] (during Lula’s government) Brazil had the highest degree of compliance with fiscal rules in history and this, again, we are going to seek,” he said.

This text was originally published here.