Study contradicts the thesis of ‘neutral PEC’ and sees spending increases of up to 0.6 points of GDP

The proposal under discussion in Congress to recompose expenditures in the 2023 Budget, the first year of the new management of Luiz Inácio Lula da Silva (PT), may increase expenditures by up to 0.6 percentage points of GDP (Gross Domestic Product) in relation to observed this year, according to calculations by FGV (Fundação Getulio Vargas).

The estimate for the PEC (proposed amendment to the Constitution) —already approved in the Senate and now under analysis by the Chamber— indicates that the amount agreed by the parliamentarians is above what would be the so-called “neutral spending”, that is, the one that would maintain the same level of expenses as in the last year of the Jair Bolsonaro (PL) government.

Neutrality was the flag raised by the transition economists and quickly incorporated by the political wing, to try to appease the criticism of the financial market —which sees as acceptable a value closer to R$ 100 billion.

The PEC, in turn, paves the way for spending above this level. The extra annual expense is estimated at BRL 169.1 billion by the National Treasury, but could reach up to BRL 193.7 billion in 2023 if the new government uses all the resources forgotten in the PIS/Pasep (BRL 24.6 billion ) at once. However, that last installment can get diluted over the years.

Researchers from FGV’s Ibre (Brazilian Institute of Economics), economists Manoel Pires (former secretary of the Ministry of Finance) and Gilberto Borça considered a series of variables to reach the conclusion that, in order to maintain expenses at the same level as in 2022 ( in relation to GDP), the extra bill should be between R$ 102 billion and R$ 152 billion in 2023.

The range is wide because it depends on different factors: real GDP growth in the coming year and the variation in prices of goods and services produced in the country (the so-called deflator).

Even so, it is possible to draw a more likely range, which would be between R$ 120 billion and R$ 140 billion, according to Borça. This scenario considers an expansion of the economy of 1.5% next year.

Borça says that, if the extra expenses in 2023 are close to the floor of R$ 169.1 billion foreseen by the PEC, the increase in the expense/GDP indicator will be around 0.4 percentage points in 2023. If the ceiling of R$ is reached $193.7 billion, he says, the advance will approach 0.6 points.

Although he recognizes that the current version of the PEC represents an increase in the level of expenses, Borça points out that this is not necessarily a problem. In his evaluation, the amount of neutral spending presented by the transition is yet another guideline for the discussions, given that there were exaggerated requests from the political wing and, at the same time, market pressure for a more drastic downsizing of the proposal.

“A lot or a little will always be relative. Given that the economy tends to slow down next year, this increase I don’t consider that worrying”, he says. For him, the slowdown in activity gives spending a certain countercyclical component, that is, capable of mitigating the expected negative effects and sustaining the economy.

“On the one hand, the recomposition of expenses is necessary, because we are with the Brazilian State on the verge of a shutdown [apagão orçamentário que afeta seu funcionamento]”, he says. “The legitimate question is how this expense will be financed, because you will need some permanent source.”

For the researchers, the absence of clear and well-defined sources of funding would lead to a deterioration in the fiscal result and a growing trend for public debt. Borça cites cuts in other expenses or an increase in the tax burden as outputs.

Uncertainty about the path of the public debt in the coming years has alarmed analysts and pressured rates charged by the National Treasury by the market. For Borça, this should only begin to settle down when the government presents its design for a new fiscal rule – which needs to be done by the end of August 2023, although the elected government wants to anticipate this schedule.

“What should a fiscal rule embrace? It should allow for flexibility and some countercyclical character, but be rigid enough for a sustainable trajectory of the debt/GDP ratio in the medium and long term. Calibrating this is important”, says Borça.

The argument that the PEC does not bring expansion was even used by the future Minister of Finance, Fernando Haddad. “What budget for 2023 must be approved so that President Lula has the same value in his first year of government as Bolsonaro had in the last year of government, [em termos de] expense in relation to GDP?”, he asked in his first press conference after being announced for the position.

Haddad mentioned that the amount in question would be BRL 150 billion, but then heard from a journalist that the PEC generates a stronger expansion over 2022 than the commented one. “As a proportion of GDP, no”, replied the future minister, to then add: “Well, 0.1 [ponto percentual] maybe”.

Calculations by FGV researchers point out that the expansion could be above that, although other factors could offset this movement. For example, the fiscal dynamics of states and municipalities —which also affects the gross debt (which condenses not only the federal government’s liabilities but also those of regional entities).

At the beginning of the mandate and with significant losses in revenue due to the change in the ICMS (Tax on Circulation of Goods and Services) on fuel, the states can cut expenses and start 2023 by making an adjustment to their accounts. The same practice should be incorporated by municipalities to preserve their cash, economists predict.

If this scenario of adjustment in the states and municipalities materializes, the reduction of expenses in these governments could offset part or all of the fiscal expansion practiced by the federal government.

Amidst the controversies surrounding the value of the PEC, the elected government tries to paste an image of budgetary recomposition in the proposal, in reference to the emptying of funds foreseen for the 2023 Budget and the lack of fiscal space for promises assumed by both sides during the campaign.

Lula has already publicly said that this was not a PEC of his future government, but a PEC of Bolsonaro, to recompose the expenses not foreseen by the current president. Some areas even had cuts of 95%, such as social assistance.

According to Pires and Borça’s calculations, the expenditure/GDP ratio would fall from 18.5% in 2022 to 17.1% in 2023 if nothing was done.

The fall from one year to the next is observed mainly because Bolsonaro needed to formally respect the spending ceiling, still in force, even after a wide release of extraordinary resources in an election year articulated between the government and Congress to expand different social programs —such as Auxílio Brasil , in addition to Gas Aid and vouchers for truck drivers and taxi drivers.

discussion in numbers

Expense/GDP ratio,

2022: 18.5%

2023 (proposal sent by Bolsonaro): 17.1%

2023 (considering the effects of the PEC): 18.9% to 19.1%

BRL 102 billion to BRL 152 billion: How much could be added to 2023 spending (relative to Bolsonaro’s original proposal for the year) to reach the same 2022 spending level (relative to GDP)

BRL 169 billion to BRL 193 billion: It is the extra amount for 2023 released by the PEC under negotiation in Congress

Sources: National Treasury, Manoel Pires and Gilberto Borça (Ibre FGV).