Brazil needs to change spending ceiling for credible fiscal rule, says Nelson Barbosa

The PT wants to remove the current spending cap rule, which prevents real growth in federal spending, but understands that the market cannot do without a fiscal anchor to calculate its expectations.

Former finance minister Nelson Barbosa, appointed by the presidency of the Perseu Abramo Foundation (from the PT) to speak on the subject representing the pre-candidate for president Luiz Inácio Lula da Silva (although he emphasizes not speaking for Lula), tells leaf that the current rule harms the country and that a more flexible and transparent spending target is needed.

Barbosa, who is also a columnist for leaf, proposes a spending limit to be defined by the elected government at the beginning of each term and that is linked to GDP (Gross Domestic Product) – instead of the rule that exists today, which freezes spending in the long term regardless of the conditions of the economy.

In addition, he argues that there should be separate limits on current spending (which includes civil servants’ salaries and expenses for the operation of the public machine) and investments (such as public infrastructure works, for example).

This is the first of a series of interviews on the five-year spending cap with the economic advisors of the main candidates for the Palácio do Planalto in 2022. The order follows the performance in the latest Datafolha survey.

Did the spending cap bring more benefits or harm to the country? I think it’s undeniable that it did more damage. It helped to reduce interest rates, but because it caused a contractionary fiscal policy. And it blocked the economic policy agenda. The Temer government did not carry out the Social Security reform and spent its political capital approving an inadequate rule and without the necessary reforms. Proof of this is that, from the roof, we have a constitutional amendment on the budget per semester, so it’s a sunroof. In practice, the rule does not exist. Today we are discussing the PEC of the Precatórios to maintain the fiction that the ceiling still exists.

Congressional moves to appropriate the Budget, such as through rapporteur amendments, were limited by the ceiling. Does the rule have a positive side in this regard? At this point, it has a very negative side, because after the ceiling the seams only increased. Exactly when the ceiling became more restricted, the amendments became more relevant.

But why did the ceiling generate the reaction of appropriation of the Budget by amendments? Because when you limit expenses, everyone rushes to ensure what they think is important. With the ceiling, you increased the power over the Executive because, every time the ceiling needs to be relaxed, there is a political price that translates into amendments. In addition, the government has been cutting investments, so parliamentarians went there and did it their way — with amendments.

​One of the main pro-ceiling arguments is the fall in interest rates after the rule. In that sense, she was positive?interest fell [logo após a regra], this is a fact. The question is how much interest has fallen because of the spending ceiling or other factors, because growth has also fallen. If the economy starts to grow again, would interest rates remain low? Evidence points to no. We have had a small recovery and there have already been bottlenecks in energy and some shocks.

But even with these likely other factors, couldn’t the ceiling alone have helped? It is an econometric question that is not clear either way. I’m not categorical in saying that it went down or that it had zero effect. Can’t say at this point. For me, the drop in interest rates has much more to do with the slow recovery of the Brazilian economy after the recession.

Is there no chance that public investments and social policies will fit into the ceiling via a review of other expenses? This ceiling rule does not fit enough for investments and social policies. I think it’s possible to cut something? In the spreadsheet, it is always possible. But given the magnitude of the effort, what was possible has already been done.

Even so, do you consider it possible to review expenses in any specific area? After pension reform, the biggest federal expense is payroll. So the next government will have to make an administrative reform for the new entrants. The main part is to create a new structure of positions and salaries, with a lower entry salary and longer progression in time so that the server does not reach the top of the career too quickly.

An elimination of the ceiling would not increase the country’s deficits and interest expenses, largely paid to banks. —a type of expenditure that is attacked precisely by the left? This is a scarecrow that is created, it is fiscal terrorism. The discussion is not taking the roof off to put nothing in its place. What is being debated is which new fiscal rule – which should be a spending target, not this opportunistic and irresponsible rule made by the [então presidente, Michel] Fear and maintained by [presidente Jair] Bolsonaro. The ceiling is a possible goal, but not the only one. The ceiling is generating interest rate hikes, creating uncertainty.

Why is the PT opting for another fiscal rule and not simply removing the ceiling? Because you need to have an anchor for expectations. You don’t replace an anchor with anything. What is being discussed in the PT and elsewhere is what the new fiscal rule is. When he sends the budget [ao Congresso], it will say that the size of the State is X, this requires a Y revenue, it will generate a debt trajectory that will be ascending, descending or stable… You have to anchor it.

What exactly should be suggested in place of the ceiling, and based on what metric? This is under debate in the PT. There is no closed proposal, but I can say my opinion. PT has already presented in 2020 [no Congresso] a rule for 2023. There it was proposed that the government would have a spending target announced at the beginning of each term, with a target for both global expenditure and individual targets – having a target for public investment, expenditure on personnel, expenditure per health capita, of expenditure per student in education, and also with environmental sustainability. I defend that it has a spending target with differentiated treatment for current expenditure and for investment, which would also have a limit.

What would be in the investment budget and what would be in the current budget? Investment should include economic infrastructure as well as social infrastructure, as well as science and technology and actions such as environmental preservation and recovery. And in the current budget, it is necessary to have a specific limit for payroll expenditure, to be defined together with the administrative reform, and a rule with minimum expenditure for health and education, which prevents real expenditure per inhabitant from falling.

Would the spending target be in billions of reais or in proportion to GDP? Numeric format is being discussed. Ideally, the government should present a scenario [para os próximos quatro anos] as a proportion of GDP and, each year, translate this into numerical terms [em reais], but this is something yet to be discussed.

And how much in relation to GDP should this medium-term limit be? It is difficult to calculate at the moment because we are in stagnation, with the possibility of recession. But the expense has to be compatible with the tax burden that society accepts to pay, so it depends on what society will accept in the tax reform.

Would you say that this rule is more lenient than the current one? It is a more flexible rule, which brings more transparency and efficiency in spending. You don’t have to invent the wheel. Brazil has had inflation targets for 22 years, and why does it work? Because the government sets the target and the BC tries to achieve the target; if not, explain. So it’s a super flexible rule.​

What to do for the country to grow? The first thing is to reduce political and economic uncertainty. By signaling a credible fiscal rule from a financial point of view and adequate to our reality, with social responsibility, the economy is already rising. We have to create a new anchor of expectation that passes through Faria Lima, but also passes through the streets. Because in the short term it will be necessary to reinforce resources for health and education, maintain income transfers, [e fazer] public investment mainly in urban development and civil construction in cities to generate employment.

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Nelson barbosa

52 years
Former Minister of Finance and Planning (in the Dilma government). Economist graduated from UFRJ (Federal University of Rio de Janeiro) and PhD in Economics from the New School for Social Research (USA). Full professor at FGV (Fundação Getulio Vargas), adjunct professor at UnB (University of Brasília) and researcher at Ibre (Brazilian Institute of Economics) at FGV.