Spending ceiling completes five years under electoral attack for change

The constitutional amendment to the spending ceiling completed five years at the end of 2021, going through the most critical moment since its creation, after significant changes made by the current government and amid challenges made by the main pre-candidates for the presidency.

Considered by investors to be the most important reference to guide expectations about public accounts in the country during most of the period, the rule was changed by the Bolsonaro government in 2021 with the aim of expanding spending through the PEC (proposed amendment to the Constitution) of the Precatórios .

Now, the ceiling faces increasing pressures as the 2022 electoral debates approach. Representatives of the main candidates, from the left and the right (with the exception of Henrique Meirelles, adviser to pre-candidate João Doria), defend changes in relation to the ceiling – which since 2017 has prevented the growth of federal expenditures beyond inflation.

Arguments for change vary and range from the view that public investments are strangled to the analysis that the current rule no longer inspires confidence among investors.

Criticism of the rule is heard even by Minister Paulo Guedes (Economy), whose liberal principles in theory combine with a rule that limits the size of the State. In 2021, amid the defense of the political class for more spending without implementing new initiatives to cut costs, the current head of the economic team adopted the speech that one cannot have childish behavior in defense of the ceiling at any price.

He says the roof is valid, but it was poorly designed and didn’t come with walls – in this case, renovations to review expenses. “The ceiling, from the beginning, is a symbol, a banner of austerity, [pois] successive governments have expanded spending beyond GDP growth for four decades,” he said in a year-end interview.

“But it was a roof of those who didn’t want to build a wall, didn’t control the floor, just built the roof and left. There was no pension reform, no expense control, no structural reform. [apenas] a promise of cost control”, he said.

The minister sees the need for other conceptual changes in the rule, but says that any debate on the subject would stress the market. “There are concepts that are wrong, but if you say that you are going to move the ceiling, that’s it. It ends up creating instability and the dollar rises,” he said.

Guedes is not the only one from the Ministry of Economy to defend innovations. Among the technical staff of the ministry, it is said that the spending cap was relevant – but not enough to improve public accounts. Therefore, its members conduct preparatory debates on a new rule that takes into account the level of public indebtedness (measured by the ratio between debt and GDP).

Using debt as a reference is seen internally as a broader way of consolidating the different variables of public accounts (such as revenue) without focusing efforts solely on the expenditure side (as the ceiling does). In the eyes of investors, after all, what matters to measure a country’s risk of insolvency is mainly the relationship between debt and GDP.

There are still no closed numbers, but involved in the discussions heard by the leaf point out that the rule may establish that Brazil cannot see its gross debt exceed something like 80% of its GDP (today it is 81.1%).

Triggers would be triggered to make the country regress linearly and in the long term to more sustainable levels, until reaching a compatible level to receive the seal of good payer from the risk rating agencies.

The ceiling could continue to live with the new rule (or not) and the conclusions of the debates could be ready in time to be delivered to the winner of the next elections. Although largely technical, the definitions are also policy-dependent.

Economist Marcos Mendes, one of the fathers of the spending cap in the Temer government and columnist for leaf, says that the ceiling worked to prevent an even greater surge in public debt — since from 1991 to 2019, primary spending practically doubled in relation to GDP. “It’s just that the political will and this historical pressure for more spending is overlapping and generating the breaking of the ceiling”, he says.

He considers that there was a dismantling of the ceiling and that the tendency is for the norm to become a new Fiscal Responsibility Law – which was strong in the past, but has been weakening. “From 2023, it will be necessary to rethink this rule and call society to make a new pact, show the importance of fiscal control in the short, medium and long term and redesign a rule that is acceptable to all”, analyzes Mendes. .

“It won’t be simple, because fiscal disorganization, especially throughout 2021, has been very strong. Reorganizing a rule that is credible, that everyone accepts and believes it will be complied with soon after [manobra] to demoralize and make a huge hole in the ceiling will be quite difficult”, he says.

Vinícius Amaral, legislative consultant in the Senate, says that the ceiling left the level of public investment very low, which fell from 4.5% before to 2.5% of primary expenditure after the ceiling (the lowest in history). “It is a scenario that compromises the recovery of the economy, since investment is an important engine of growth”, he says.

In addition, he says that the proposal to promote an adjustment focused solely on expenditure interdicts the tax debate and leaves a profusion of undervalued revenue waivers and under-taxation of the richest 1% of the population.

“We still tried to maintain it in 2021, using a whole series of expedients, but by 2022 it was evident that these practices had been exhausted. […], which will require a broad debate on tax rules to be resumed in 2022”, he says.

Felipe Salto, executive director of the IFI (Independent Fiscal Institution), says that the ceiling was a possible answer, which helped the country to control expectations by holding back inflation and allowing interest rates to fall. For him, however, the design had problems.

“Instead of correcting them, what has now been done with the PEC dos Precatórios was to abandon the ceiling. Nothing is being proposed in its place. The open hole leads to a non-negligible loss of credibility. In 2023, the challenge of re-establish a credible fiscal framework”, he says.

Salto completes that the IFI does not recommend public policies, but says that an eventual new rule cannot be draconian. “The literature recommends that the fiscal framework be simple, have escape valves and therefore not be draconian. There is no point in having a hard rule that is not viable”, he says.