Transition economists suggest spending target over cap

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Replacing the expenditure ceiling with an expenditure target, separating short-term current obligations (which support the funding of the public machine) from spending on long-term investments. This is one of the pillars of the new fiscal framework proposed by the group of transition economists, which brought together André Lara Resende, Guilherme Mello, Nelson Barbosa and Persio Arida.

Of the four, Mello (secretary of economic policy) and Barbosa (director of the BNDES) are in the government today.

The quartet understands that the concept of spending targets could transfer to fiscal policy principles that were successful with the use of inflation targeting in monetary policy, such as predictability and a sense of commitment.

The proposal was handed over to members of the government, but was never disclosed. The Minister of Finance, Fernando Haddad, has already said that the new framework will be discussed with different interlocutors, including representatives of the financial market. The suggestion of the transition group is one of those on the table.

Within the PT, however, there is a group that prefers a return to the past. This current defends that the third term of Luiz Inácio Lula da Silve (PT) resumes the logic of meeting only the primary result target, removing public investments from the account, for example. If this idea prevails, all alternative suggestions for a new fiscal regime would be left in the drawer.

The quartet of transition economists did not define a formal rule in the final report, but outlined pillars that give a north for the framework that they consider more efficient.

According to reports heard by Sheet, in general principles, the group defended that an efficient fiscal regime should be transparent and based on long-term plans, with mechanisms to prevent wasteful and demagogic spending. There must be criteria for the State to seek cost efficiency and be effective in providing public services, but without the rigidity of the ceiling rule.

The group also stated that the application of resources needs to be subjected to periodic analysis so that it is possible to monitor costs, benefits and returns of the application of public money by the State.

The starting point for setting the spending target could even be a proportion of GDP (Gross Domestic Product) —the value recorded for the Budget, however, would be nominal and fixed.

According to the group, it would be possible to incorporate into the construction of the spending target some principles of the rules applied to the old primary result target. Before the cap, the government defined the primary result for the following year and made projections for subsequent years, making the values ​​official in the LDO (Budget Guidelines Law).

The spending target for the following year would follow this rite and would also be associated with a set of projections, which would include estimates of revenue, primary result, interest payments and debt.

Spending scenarios for the following years would also be presented, with no commitment to compliance, but which would serve as guidelines, based on projections.

The annual amount spent would be a fixed parameter. It would not be possible to spend more than determined. On the other hand, according to the proposal, there would be no contingencies. Each area would have its spending target and would plan within that amount.

There are some important details.

The investment spending target, or capital spending, even if set annually within the overall spending target, with projections for the following years, would be defined based on a long-term plan.

It would not be allowed to migrate resources from one type of expenditure to another —spend less on investments, for example, to increase current expenditures, and vice versa.

Within current expenditures, it would be desirable to set a target for personnel expenses, based on a salary plan for civil servants, as well as having projections for the number of civil servants —a kind of planning of actions in human resources. This would avoid personnel fluctuations and setbacks with demands for readjustments.

DEBT SCENARIO X DEBT TRIGGER

The treatment given by the transition group to the debt issue has important differences compared to other proposals for fiscal rules, such as those presented by the National Treasury, the Elas no Budget group and the economist Felipe Salto.

They suggest that debt can act as a trigger. That is, above a certain level of indebtedness, spending is blocked, for example.

The quartet of economists does not consider the procedure adequate because the Brazilian public debt fluctuates for non-fiscal reasons. It may be affected by the exchange rate, for example, which has fluctuated a lot.

It understands, in the proposal, that the spending target should consider a debt trajectory, but without using the debt amount as a lock.

The new framework would work with net debt, as in most countries. In Brazil, the discussion between using net or gross debt within the fiscal rules generated many clashes, but the issue has already been pacified at the international level. Recently, even New Zealand, a former advocate of using gross debt as a parameter, has adopted net debt in its fiscal rule.

It was considered important to have a safety valve in case the spending target and scenarios were overrun by exceptional events such as a pandemic, weather catastrophes or the global financial crisis. In this case, it would be necessary to present a plan, foreseeing actions and deadlines for recovering the trajectory of the target and the original scenarios.

How to treat the primary outcome generated discussions.

One of the points debated was whether it would be appropriate to set a tolerance interval for the primary, applying conditions, depending on the result. If the interval were breached, the government would have to explain how it would resume the target, as the Central Bank does in case of non-compliance with the inflation target.

It was also discussed what could be the treatment in case of an excessive deficit. The European Union, for example, adopts sanctions, but they have been changed over the years, as the scenario has changed for the different members of the bloc. It would be necessary to evaluate the most appropriate measures for the Brazilian reality.


NEW TAX FRAMEWORK PROPOSED BY THE TRANSITION ECONOMISTS GROUP

As a general principle, the new tax regime should be flexible, transparent and based on long-term plans, with:

  • General spending target for the following year, associated with revenue, primary result, interest payment and debt estimates
  • Within the general goal, there would be a current spending goal and a capital spending goal (investments), defined within a multi-year plan
  • Within the current spending target, in turn, there should be a spending target on servers, based on a long-term human resources plan
  • There would be a scenario for debt within the spending target, but the debt would not be a trigger for budget constraints
  • An interval could be set for projecting the primary result, as well as sanctions in case of non-compliance

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