Spending ceiling: understand what it is and how it can change

The spending cap rule, approved by Congress in 2016, during the term of President Michel Temer (MDB), limits the growth of federal government expenses in order to avoid the lack of control of public accounts.

Since it came into force, it has become the main anchor of public accounts, being pointed out as the mechanism that helped to control the government’s finances.

However, the rule has been circumvented several times, especially after the pandemic. For critics, the ceiling stifled the government’s ability to react, especially in crisis situations, such as health.

During the 2018 election campaign, all major candidates proposed some type of revision to the rule. The winner, Luiz Inácio Lula da Silva (PT), said he would revoke the rule and called it “stupidity” in his inauguration speech.

The attitude of the current president and his team has left the market apprehensive with a new scenario of lack of control of public accounts, as seen during the government of Dilma Rousseff (PT).

The PEC (proposed amendment to the Constitution) of Gastança, approved in December, raised the ceiling for 2023 by BRL 145 billion and provided for an additional BRL 23 billion not subject to the rule for investments, among other flexibility. The text also predicted that the new government should present a new fiscal rule to replace the current one this year.

The Minister of Finance, Fernando Haddad, promised to present a proposal this semester.

What is the spending cap?

Constitutional Amendment No. 95, of December 15, 2016, is also called the “New Fiscal Regime”. The main rule established by him is the limitation for the federal government of primary expenses (which does not include financial expenses, such as interest payments) to the same amount as the previous year corrected for inflation.

Initially, it was expected to last 20 years, with the forecast that it could be revised halfway through (in 2026) through a bill. The Bolsonaro government, however, managed to pass a proposal in Congress that made the ceiling more flexible and at the same time extinguished this revision, meaning that any new attempt to change the ceiling would have to be done by amending the Constitution (which requires a lot of effort). more votes).

What was the motivation for adopting the spending cap?

As the different governments since 2014 have found it difficult to reach a surplus in public accounts, it was necessary to find a new anchor to curb spending.

What is the scope of the spending cap?

It applies to all Powers at the federal level. Does not apply to states and municipalities.

What is the indicator used to correct the spending ceiling?

IPCA (IBGE consumer price index) in the 12 months ended in December of the previous year.

What happens in case of non-compliance with the ceiling?

The amendment does not deal with specific punishments, but there is a risk of actions for non-compliance with budgetary rules. The original amendment had ceiling correction triggers. In case of non-compliance with the limit, the following would be prohibited:

• Readjustment of servers, creation or increase of any type of benefit
• Creating jobs or restructuring careers that raise expenses
• Hiring or public tender (except leadership replacements without increasing expenses and effective or lifelong positions)
• Creation of mandatory expenditure or measure that raises these beyond inflation
• Financing programs, new subsidies and concession or expansion of tax benefits

What are the exceptions to the spending cap?

Constitutional transfers to states and municipalities, extraordinary credits (which can be created in cases of urgency and unpredictability, as occurred in 2020, during the Covid-19 pandemic, and also in the following years), expenses for holding elections, increase in capital from non-dependent state-owned companies and funds raised by the Union with oil auctions.

What are the special rules for health and education?

The constitutional amendment guarantees the minimum application of the constitutional floors for health and education, which are corrected for inflation. Also outside the limit are the Union’s supplement to Fundeb (R$ 14 billion/year), Fies and Prouni (tax waiver).

What holes have been drilled in the spending cap since it was passed?

An estimate by economist Bráulio Borges, from Ibre-FGV (Brazilian Institute of Economics, from the Getulio Vargas Foundation) points out that the ceiling was breached by BRL 795 billion in four years, during the government of Jair Bolsonaro (PL). The main changes served to increase the amount of social programs during the pandemic or even to boost benefits in an election year.

In September 2019, Congress approved a PEC not to account for federal transfers to states and municipalities on the allocation of pre-salt onerous assignment. In the same year, the government recorded the capitalization of Emgepron, a state-owned company linked to the Navy, to use the funds to purchase new ships.

Already with the pandemic, the Emergency PEC opened a space to bank part of the emergency aid.

In December 2021, the Precatorios PEC changed the ceiling correction period (it was based on inflation measured by the IPCA in 12 months until June of the previous year and became from January to December), which raised the limit from the year following year and also enabled the Union to postpone the payment of debts recognized by the Justice.

In July 2022, a new PEC increased the amount of Auxílio Brasil, from R$400 to R$600, doubled the Vale-Gás and created a benefit of R$1,000 for truck drivers and taxi drivers on the eve of the elections.

What were the impacts of the spending cap on the economy?

Celebrated by economists and the market, and attacked by defenders of more resources for public policies, the ceiling became the main anchor of the government’s accounts, being pointed out as the mechanism that helped to control the government’s finances, after a scenario of lack of control and loss of investment grade in 2015. It served to anchor investor expectations and hold interest rates. Successive dribbles to the ceiling, however, were undermining his strength.

How long is it worth, after the Spending PEC?

The enacted amendment establishes that the federal government will present to Congress, by the end of August, a new rule for public accounts to replace the ceiling. In the first days of President Luiz Inácio Lula da Silva’s third term, the Minister of Finance, Fernando Haddad, signed a commitment to send the proposal to Congress in the first half of the year. The promise is an attempt to convey the message of fiscal austerity, after the approval of the PEC of Spending, which authorized the increase in expenses. The amendment determines that, once the bill with the new fiscal framework is approved, the spending ceiling is revoked.

What are the alternatives under discussion to replace it?

Recently, the new Secretary of the Treasury, Rogério Ceron, indicated in an interview with Sheet the possibility that the new fiscal rule will give flexibility to public investments, but provide for greater limitation for current expenses (which include salaries and benefits).

Since the end of last year, the Treasury has been working on a reformulation of the spending ceiling that authorizes the real growth of expenses according to the level and trajectory of the public debt, at a rate to be defined every two years. The rule also grants a spending expansion bonus in the event of an improvement in the surplus in public accounts.

Economists Arminio Fraga (former president of the Central Bank) and Marcos Mendes (from Insper and one of the fathers of the current ceiling) propose a fiscal anchor with a target of reducing the debt/GDP ratio (which measures the financial health of the government) to 65 % by 2032, by limiting spending growth.

“The revenue would be estimated for a time horizon and the expenditure would be limited in order to reach, on average, the primary surplus necessary to bring the debt to the desired level”, they say.

Economist Felipe Salto suggests that the spending ceiling be replaced by a debt ceiling, based on limiters for the public debt, with a primary surplus target calculated based on the trajectory of this debt. “The advantage of the proposal is to reorient fiscal policy towards what really matters, which is the trajectory of the debt, and to avoid an excessively contractionary fiscal policy”, he told the Sheet.