Transition economists agree on the need for a new fiscal rule, says Guilherme Mello

Economist Guilherme Mello, a member of the quartet leading the transition of government in the economic area (alongside André Lara Resende, Persio Arida and Nelson Barbosa), claims that there is consensus in the group that the spending cap rule will need to be modified and that the country will need a new framework for public accounts.

He says that the different suggestions for reforming the rule presented in the public debate so far –such as that of the National Treasury and that of economists Arminio Fraga and Monica de Bolle– are being studied and will be considered in the discussions.

Mello argues that the modification of the ceiling rule be made by means of a complementary law, which would require a change via PEC (proposed amendment to the Constitution). He does not rule out the inclusion of such authorization in the so-called Transition PEC, which was presented to party leaders this week. However, he points out that the group has not yet made a decision on suggestions for the proposal.

How is the discussion on reformulating the fiscal framework going? We have received contributions from economists such as Felipe Salto, Monica de Bolle, Arminio Fraga. Also from parliamentarians, from Senator José Serra. The Treasury also made one. Our plan is to read them, analyze them, discuss among ourselves and make a diagnosis of the current framework, show the challenges and dilemmas that arise, and present a suggestion. It doesn’t have to be a closed proposal, but a suggestion on how we think it should be handled. But we are still in the early stages of receiving data and suggestions.

The economics group was formed a week ago, and we have less than a month to complete the diagnosis. We’ve already had three meetings. We have a huge advantage these days with something called WhatsApp. We are in permanent assembly.

Vice President-elect Geraldo Alckmin spoke about removing the spending cap from the Constitution. That would be the idea, and if so, could you already insert a device in the Transition PEC to allow discussion in a complementary law? In my personal opinion, it would be important to do as it was with the LRF [Lei de Responsabilidade Fiscal] , with a supplementary law. This is a question that will have to be decided by Parliament. There is no finalized discussion, in the sense of what the transition group’s suggestions will be, either for the PEC or for the new framework [fiscal] or tax reform. Nothing has been finalized.

What do you agree on and what do you disagree on in this first presentation you had? There is great agreement, firstly, on the need to review the Brazilian fiscal framework. [Ele] it has lost credibility, in some respects it has become dysfunctional and, therefore, needs to be reviewed beyond this immediate guarantee of payment for social programs. Just as there is an understanding that it is necessary to move forward in a discussion of tax reform that improves competitiveness, that makes the system fairer, more equitable. There is a lot of convergence. Now, the format of the proposal has not yet been discussed.

Why didn’t they make the request for an increase in the Budget in parallel with the commitment to change the fiscal rule? It is the lack of this that fuels the ongoing debate about whether they are breaking a rule, which will not be the rule in the future. At this moment, first it is necessary to quickly guarantee a space for the payment of the Bolsa Família, which is at risk without the approval of a PEC or some legal measure that allows the increase of R$ 600. Number two, it is necessary to recompose the programs social services that are underfunded. It needs some public investment. It is a text that is open to discussion by parliamentarians. Does this mean there will be no rule discussion? Not. We said throughout the campaign that there will be a rediscussion of tax rules. President Lula says that. Now, this discussion has to be done with the new Parliament, because it is a structural change, as well as the discussion of tax reform. They will occur when we have appointed ministers, sworn in president and new Parliament, and will be placed on a negotiating table that will also include society. The PEC does not have this objective.

Are you comfortable with the value out of the ceiling? Even if it is not in the body of the PEC, the estimated value is being a major source of stress in the market. Let’s say that exactly the amount under discussion today is approved, R$ 198 billion. It is not very credible that there will be no change on the taxation side, on the spending side, no change in fiscal rules, the expectation of growth will not change. It is a highly unlikely scenario.

The Lula government will have, as it always has, a commitment to fiscal responsibility. But this commitment will not be at the expense of the poorest, of social responsibility. This PEC is a first measure, required by the legacy that the current government bequeathed us. During the election, Bolsonaro himself said that, if elected, he would change the fiscal rule and change the Budget that he himself sent.

Another controversy is the expiry date of the exception to the ceiling, one year or four years. By not binding the deadline, you are also proclaiming a principle of not linking the payment of the social benefit to negotiations of a political nature. If you say ‘it’s only for one year’, deep down you bring back a scenario of uncertainty. It would only be valid for 2023, and, if a new fiscal framework is not approved by the middle of the year, the LDO [Lei de Diretrizes Orçamentárias] and the LOA [Lei Orçamentária Anual] go with the ceiling, that is, once again you will have insecurity about the payment of the social benefit. The ideal is to have a longer period, precisely to respect the principle that any reasonable person should agree with: the resources destined to guarantee the income and citizenship of the most vulnerable people cannot be linked to legislative uncertainties. It is a principle that should be preserved in parliamentary negotiation.

It was said that the transition economy group was sidelined, excluded from the discussion of the PEC. That’s right? No, there is no type of curtailment or cornering. The PEC began to be discussed and formulated before the formation of the transition group. From that moment on, it became very much a dynamic of conversations and negotiations in Parliament. What did we, at the first meeting, already talk about? We will ask for information to know what is being discussed. At our second meeting, we received a first set of information. And now that we have access to the definitive version of the PEC, we agreed to carry out an analysis and, if we have any suggestions, we will communicate them and, eventually, they will be taken to the president [eleito] Squid. It’s not that there was a skirmish. The times and functions are different. Everyone was doing their job. The role of the transition technical group is to carry out a diagnosis of the Budget situation, map out short-term challenges, and make suggestions.

There was a coordinated move by Alckmin and Mercadante to signal both a review of expenses and a review of exemptions. Do you already have a focus on these fronts? Mercadante said that ‘we will have nice surprises in this area’, what would they be? What we don’t lack are people, researchers, specialists discussing the topic of taxation. They are helping to build ideas, proposals. It’s not just people from the left, it’s not just people from the right, it’s not just from the public sector. And I am also convinced that we are going to have good, well-formulated, consistent surprises, to reformulate the fiscal framework and the Brazilian tax framework, in order to recover credibility, predictability, transparency, and also the capacity for growth, competitiveness, improve our income distribution.

Regarding tax reform, is there an analysis within the group of taking advantage of PEC 45 or PEC 110, which are already being processed? We are not yet, to be quite honest, in a discussion of tax reform proposals. Initially, we are raising the theme of the group’s organization, the work methodology and also the issue of expenses, the PEC, the debate on the fiscal framework. But, for example, the idea of ​​creating a VAT [Imposto sobre Valor Agregado] it is quite widespread. The importance of simplifying the structure of indirect taxes, of reducing the regressivity of these taxes, of fighting the tax war. All of this is agreement. The format we will discuss.

Which is more urgent within this flight plan, the tax reform on consumption or on income? Or can you play both together? As we did not discuss this, it would be a personal response, not the group’s. But I think it’s important to discuss it in parallel, build a reform of the system. If you are going to approve everything together, if you go separately, but that the formulation be done together, which is what makes it possible to change the current Brazilian tax balance, which is very heavy and which penalizes the poorest.

Fuel exemption, at a cost of more than R$ 50 billion, is included in the Budget, the law that guarantees its continuity does not exist, the date to end is December 31, 2022. What are you going to do? No kind of shock at first is prudent. Especially because the dynamics of fuel prices are still a little unstable. As we said from the beginning, once the election was over, prices would go up again, and they did. I believe that at first you will have to assess what the price scenario is and eventually maintain [a desoneração]and then reevaluate, see what the best alternatives are.

We’ve already had two days of very strong reactions, not only from the Stock Exchange or the dollar, but from interlocutors with very harsh criticism of Lula’s speeches. As mr. did you see this? The president was elected to speak and to communicate with the Brazilian people. I think there is a misinterpretation. What he said is that it is not possible to just talk about fiscal responsibility and forget about social responsibility. The two things communicate. What he is underscoring is this dual commitment. If you try to conquer this fiscal responsibility in spite of social responsibility, you cannot achieve it and you still have serious social problems.

The market is a space of very outcropped and very fast perceptions. I’m sure anyone who reads the president’s statements [eleito] Lula, not only the most recent ones, but the historical set, clearly understands what is at stake. I think these things pass, one hour the market is more discouraged, in another more excited.

The government’s concern is to facilitate the path to implement the program that was elected: to combine fiscal responsibility with social responsibility, including the poor in the Budget, making the very rich pay the Income Tax that they do not pay today and building public policies capable of resuming the development. In the same way, we will have declarations, one guy will like it, another will not like it, but the important thing is to be able to move forward.