PEC of the Transition arrives at the Senate with a ceiling setback; understand in 4 points

With the endorsement of President-elect Luiz Inácio Lula da Silva (PT), the rapporteur for the 2023 budget, Senator Marcelo Castro (MDB-PI), filed in the Senate this Monday (28) the so-called “PEC of Transition”.

The name is an allusion to a proposal for a constitutional amendment suggested by the transition team, which provides, among other things, to remove the expenses with Auxílio Brasil from the spending ceiling. In total, it is estimated that around R$ 198 billion a year will remain outside the ceiling.

The formalization of the text with the Senate gives the start for it to be voted on by the National Congress. The PEC is considered vital by the command of the transition to President Lula’s new government because it would allow the fulfillment of some of the PT’s campaign promises, such as maintaining the Auxílio Brasil at R$600 and recomposing the budget of programs such as Farmácia Popular.

But the text that was delivered to the Senate is different from the original version of the measure that had been released just over a week ago. Initially, the elected government wanted the expenses with the Auxílio Brasil to remain outside the spending ceiling for an indefinite period. The measure was even included in the draft of the PEC announced by the transition team.

The lack of a deadline, however, generated criticism from opponents and negative reactions from the market. The proposal represents a setback in relation to the previous one and now provides that this exceptionality will last for only four years (2023 to 2026).

The text foresees other measures considered important for the new PT government.

Check below four points to understand the Transition PEC.

What can change with the Transition PEC?

The main proposed changes are:

• Withdraw investments in the Auxílio Brasil program (formerly Bolsa Família) from the spending ceiling between 2023 and 2026. The estimated value for this purpose is R$ 175 billion per year.
• Remove from the spending ceiling investments in socio-environmental programs or related to climate change funded by donations
• Remove from the spending ceiling expenses incurred by universities or federal institutes that are funded by donations or agreements
• Allow the government to spend up to BRL 23 billion on investments in case of excess revenue

To enter into force, the PEC needs to be approved by three-fifths of parliamentarians in two rounds in each Legislative House: Senate and Chamber of Deputies. If it obtains the necessary votes, the PEC is enacted without the need for approval. [sanção] of the President of the Republic.

Among all legislative measures, the PEC is considered the most difficult to pass because it requires a higher voting quorum.

The elected government argues that, to guarantee the payment of the Auxílio Brasil of R$ 600 from 2023, the PEC would need to be approved later this year.

How will this money be used?

In an interview with CNN Brasil on November 14, the senator-elect and one of the main articulators of the transitional government, Wellington Dias (PT-PI), stated that the money foreseen by the PEC would be spent on the payment of the Auxílio Brasil of R$ 600 and a bonus of R$150 per child up to six years of age in families receiving 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.

Daniel Couri, executive director of the IFI (Instituição Fiscal Independente) of the Senate, 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 new government will want to spend this money, but there are signs that it wants to spend it on programs such as Popular Pharmacy, indigenous health, resumption of works and housing policies”, said Couri.

Another point foreseen in the draft of the Transition PEC provides for a mechanism that limits how much the government can spend on investments when there are extraordinary revenues, those that occur outside of what was planned by the government.

Under the proposal, according to Marcelo Castro, if the government has excess revenue, it may spend up to 6.5% of that amount (based on the 2021 level) on investments limited to BRL 23 billion per year.

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, in an interview with BBC News Brasil on November 16th.

“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”, said Carla Beni, economist and professor at FGV (Fundação Getúlio Vargas).

In a press conference this Monday, Marcelo Castro said that the PEC approval would be essential to guarantee the amounts of the Brazil Aid at R$ 600 next year.

“It is essential, it is indispensable. The PEC needs to be approved otherwise the country will not have an adequate budget next year. It is impossible and unimaginable that we do not have this PEC approved”, said Castro.

“There is no forecast in the 2023 budget for maintaining the Brazil Aid at the current value. It is urgent to guarantee the maintenance of this value. There are millions of people who depend on this benefit for their daily lives. The elected government is looking for all possible ways to ensure that,” said former finance minister and member of the transition team Nelson Barbosa.

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.

The doubt existed because the processing of the PEC is more arduous. Therefore, another possibility studied was the issuing of a provisional measure (MP) right at the beginning of the Lula government opening an extraordinary credit in the budget to complement the benefit.

In recent days, however, the idea has lost strength in the face of the risk that the measure could be challenged in court – giving rise to accusations of violation of the 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 clear the plans to rebalance the 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.

For Beni, if the measure were valid for just one year, the risks for the deterioration of public accounts would not be great. But, with the extension of this period, she demonstrates concern about the negative impacts on the finances of the Union.

“If the government does not recompose its revenues by reviewing exemptions, pointing out new sources of revenue, then this could indeed affect our level of indebtedness”, said the professor.

Daniel Couri, from IFI, follows the same line as Carla Beni. According to him, the recent tension demonstrated 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.

This text was originally published here.