Haddad narrows down fiscal rule proposals and begins to define a team

Announced by President-elect Luiz Inácio Lula da Silva (PT) as the future Minister of Finance, Fernando Haddad will face a double challenge as of next week. Contribute to resolving the imbroglio of the 2023 Budget while preparing the first definitions for the challenges in the portfolio.

The to-do list, which includes long-term reforms that will immediately touch different interests, is being kicked off by assembling its economic team. The expectation is that names from São Paulo’s politics, academia and economy will be sought – where most of its allies are.

Among the names that have good transit with the future minister and are quoted –not just for his portfolio, but for different functions in the economic area–, there are professionals of different stripes.

Guilherme Mello, who participated in the preparation of the government program and is in the economy transition group. Gabriel Galípolo, former president of Fator bank and member of the infrastructure transition group. Marcos Cruz, who worked at the global consulting firm McKinsey & Company and was Haddad’s finance secretary at the São Paulo City Hall. Bernard Appy, former Finance Secretary during Lula’s previous administrations and a specialist in taxation (and author of one of the main tax reform models being discussed in the country today).

Although in the eyes of the market, the PT seems far from the liberal recipe preached by banners such as the World Bank, which in recent days has delivered a plan with suggestions of the kind to Haddad, the party and the future minister himself have been showing willingness to continue with the reforms . Next, these and other challenges of the new Minister of Finance with the first indications of how they will be faced.

Record deadline to create a new fiscal framework

Formatting the new fiscal framework is considered the major task after taking office. The change, which was already a will expressed by members of the PT since last year, became a commitment expressed in the PEC (proposed amendment to the Constitution) of the Transition, which has already passed through the Senate and needs to be approved by the Chamber.

The text so far says that the President of the Republic will submit to the Legislative by August 31, 2023 a bill to “institute a sustainable fiscal regime to guarantee the country’s macroeconomic stability and create the appropriate conditions for socioeconomic growth”.

The PEC also provides that, when such a law is sanctioned, the spending ceiling is automatically revoked.

In practice, this means that the economic team will have just eight months to define the parameters of the new framework, produce new tax legislation and consolidate economic consensus and political support for the proposal. According to Haddad, the discussions will mobilize the new team right from the start of the work.

“We will have two or three months to discuss with the assembled team [o novo arcabouço fiscal]”, said Haddad to the Sheet🇧🇷 “It’s a government decision, not a transition one, which points out needs and projects scenarios.”

The debate will be intricate because there are many models and opinions on the topic. Since Lula was elected, for example, at least five drawings have been made public – two by the Ministry of Economy, although only one of them by the hard core of the technical staff of the National Treasury.

The group of transition economists, which brings together Persio Arida, André Lara Resende, Nelson Barbosa and Guilherme Mello, in addition to delivering the diagnosis of the Economy, is also already writing suggestions for the elaboration of this new framework. According to Haddad, the pillars are still under discussion.

“Restrictions, I’ve only heard about the debt target idea,” he says.

The transition group understands that a long-term debt trajectory is part of a fiscal rule, however it does not consider it appropriate to establish a fixed target, since the relationship between debt and GDP (Gross Domestic Product) depends on countless factors that are outside of government control. In addition to the GDP result itself, the list includes the impacts of inflation, interest, exchange rates, currency swaps, Central Bank repo operations and even STF (Federal Supreme Court) decisions.

In the European Union, for example, there are long-term debt indicators that, if breached, require the presentation of a new fiscal plan. There is no indicator blocking the goal.

Accommodate the PEC values ​​in the 2023 Budget

In the final stretch of the year, after the PT managed to get the Transition PEC approved in the Senate, the challenge is to maintain a political seam with the mayor Arthur Lira (PP-AL) and avoid a dehydration of the text in the House. Shortly after approval, Lula’s economic team –of which Haddad will be the main representative– will have to negotiate with Congress to define where the extra spending allowed will go when modifying the 2023 budget proposal sent by the Bolsonaro government.

The 2023 Budget, even with the future increase in value, remains a financial puzzle.

Basically, the PEC increases the spending ceiling by BRL 145 billion in 2023 and 2024 for the payment of the Auxílio Brasil (which will once again be called Bolsa Família) and releases another BRL 23 billion for investments outside the cap in case of extraordinary collection. of revenues – in addition to containing other measures.

With the adaptations provided by the PEC, it will be necessary to carry out a sweep to start the financial recomposition of each portfolio and balance the needs for public policies with the political interests of Congress – especially if the rapporteur’s amendments survive the judgment of the STF.

“Hope [Haddad] be smart to help [na tramitação da PEC]🇧🇷 I expect. If it were to get in the way, I wouldn’t be nominated,” Lula said in an interview to the press about choosing the future minister.

Dismember the superministry of Economy and maintain dialogue with peers

It has already been decided that the current Ministry of Economy will be dismembered into three folders. In addition to the Treasury, which Haddad will take over, the Ministry of Planning, Budget and Management and the Ministry of Industry, Commerce and Services will be recreated.

According to the coordinator of technical groups of the transitional cabinet, former Minister Aloizio Mercadante, the structure of the new Planning is still under discussion. The more short-term budget and personnel management areas can be separated from the long-term public policy structuring area.

Haddad has already stated that before making the first decisions he wants to sit down and talk with his partner in Planning.

The search for harmony between these three entities has always been challenging. Recomposing the structure means dividing functions and powers that are currently concentrated, and achieving a balance between the demands of each portfolio that are actually opposing.

An example. Those who work in macroeconomics in the elected government, with a speech typical of the Ministry of Finance, say that it is necessary to reduce tax expenses, basically exemptions, which are already around R$ 450 billion per year. However, the currents that defend the State’s action in favor of the economy, normally housed in the Ministry of Industry, Commerce and Services, already talk about the need to boost some sectors.

Close consensus to unlock tax reform

The debate on the new fiscal framework is linked to tax reform, the main key Haddad hit as speculation grew about his name for the Treasury.

The tax reform is defended by him as necessary to reduce the Brazil cost. He says it is possible to approve one of the proposals that is in Congress in the first half of next year. Impossible is not.

The problem is, like any reform, facing the different interests involved. PEC 45, which the PT signals as its favorite, has been resisted since it gained strength in Congress. Entrepreneurs in commerce fear the size of the rate resulting from the merger of taxes, those in services prefer the creation of a digital tax with an exemption from payroll and those in agriculture consider it terrible because there are effects such as the encumbrance of the basic food basket and the taxation of currently exempt inputs.

The discussion will be even more challenging if there is an increase in the tax burden, which is a real possibility given the size of the fiscal gaps that are designed for the coming years.

Nelson Barbosa, former Minister of Finance and Economy and current member of the transition team, already said in an interview with Folha about the new tax rule that “the expense has to be compatible with the tax burden that society accepts to pay, so it depends of what society will accept in the tax reform”.

The search for more collection by raising the tax burden would have resistance from the population as a barrier, but research indicates that there would be more acceptance if the higher collection was restricted to the upper classes.

Put administrative reform in motion

Cited by PT economists as necessary to lower entry salaries in public power and increase career progression time, the administrative reform is defended by Lula and will require a significant convincing effort from the party so that the issue does not become a battle against servers.

Here again, the alignment between Finance and Planning will be fundamental.

As the World Bank director for Brazil Johannes Zutt would say, reforms will always generate winners and losers – with the losers quickly noticing that they are being ripped off and making a lot of noise, and the winners taking a while to realize what they are going to gain .

In addition to successful proposals, it is a requirement of the mission to have the political leadership to maintain conviction in the reforms and convince Congress and society about their need. The Real Plan was a sample of this when it was born at the hands of an elite of economists, but going forward under the political leadership of the then Minister of Finance Fernando Henrique Cardoso – who was even elected President of the Republic in the first round after passing through the portfolio .