Inflated correction in the spending ceiling will give Bolsonaro an extra R$1.8 billion to spend

The inflation forecast adopted by Congress in the preparation of this year’s Budget will guarantee the Jair Bolsonaro government (PL) an extra space of R$ 1.8 billion to spend in 2022, the year in which the president will seek reelection.

Congressmen approved the budget piece with a 10.18% correction in the spending ceiling, the rule that limits the advance of expenses to inflation. This was the projection for the IPCA (Broad Consumer Price Index) for 2021. With that, the spending ceiling was set at R$ 1.679 trillion for this year.

Inflation, however, ended up at 10.06%, according to the IBGE (Brazilian Institute of Geography and Statistics). Under this variation, the expenditure limit would be BRL 1.677 trillion.

The exact difference is R$ 1.829 billion, for all Powers. Only the Executive will have a gain of R$ 1.75 billion.

The government understands that it is not obliged to cut the excess of the spending ceiling in the 2022 fiscal year.

The interpretation is that the PEC (proposed amendment to the Constitution) of the Precatórios allows the adjustment to be made only on the basis of calculating the limit for the following year – in this case, 2023.

“The effect of the IPCA realized (10.06%) was lower than the IPCA projection used in the preparation of the substitute for the Ploa [Projeto de Lei Orçamentária Anual] 2022 (10.18%) will only be reflected in the elaboration of Ploa 2023”, confirmed the Ministry of Economy to leaf.

Specialists fear that congressmen will find in the rule an incentive to throw up inflation projections and, thus, boost expenses of interest to deputies and senators in the coming years.

“There will always be uncertainty. Enough [Orçamento do] next year, can overestimate again, predict inflation [de 2022] one percentage point more and cut that 0.12 [de diferença no IPCA em 2021]”, says Marcos Mendes, researcher at Insper and columnist at leaf.

“It created a gray area”, says he, who was one of the formulators of the ceiling in 2016. Mendes is critical of the changes made by the PEC dos Precatórios, but recognizes that the government’s interpretation is supported by the enacted text.

The constitutional amendment states that the difference between the inflation projection and the final result will be calculated by the Executive “for the purpose of defining the basis for calculating the respective limits for the following year”.

The rule also provides for the Ministry of Economy to update the projections for the IPCA monthly, until the Budget is approved. But economist Leonardo Ribeiro, a Senate analyst and specialist in public accounts, says that no part of the rule obliges Congress to use the official number.

“We are going to create a new creative accounting. The inflation estimate will be a tool to create margin [de gastos], and we are dealing with billions. An ‘error’ in this inflation estimate can have an impact of billions”, says Ribeiro.

For him, the interpretation adopted by the Economy can further weaken the ceiling as a fiscal anchor, after successive changes in the rule have already scratched its credibility.

“The ceiling is related to an inflation estimated by Congress. It can have any number there”, says Ribeiro.

Before the creation of the ceiling, it was common for congressmen to inflate the revenue forecasts in the Budget to pave the way for increasing expenditures without disregarding, on paper, the fiscal target – which results from the difference between spending and collection.

The problem is that the frustration of these revenues forced the government to cut spending, under intense political wear and tear. Then the government itself and Congress created exceptions for expenditures, in a process that undermined the credibility of the fiscal target.

Mendes understands that the gap in the cap rule is narrower because the correction is still linked to inflation, and it will be necessary to justify the estimates adopted.

“Now, it is still a space of discretion to accommodate R$ 1 billion for one side, R$ 2 billion for the other”, he says.

The possibility of inflating the ceiling comes from the change in the correction rule, approved in the PEC dos Precatórios.

Previously, the limit was updated by the IPCA observed between July of the previous year and June of the same year the Budget was prepared. After the change, the index to be used is from January to December of the year in which the budget piece was sent.

The Budget proposal is sent on August 31 of the year prior to its validity, when the effective variation of inflation for the year is still unknown.

Even if the government updates the estimate in the following months, the Budget needs to be approved by the end of December — before the release of the final IPCA result, which takes place only in January of the following year. Hence the space for Congress to approve expenditures above what the ceiling should be.

From the understanding of the economic area, the difference of R$ 1.8 billion estimated this year serves only as a reference for the preparation of the 2023 Budget, to be sent next August.

In the document, the correction of the ceiling should be made on R$ 1.677 trillion, already with the excess discounted.

The interpretation prevents the government from having to make an even greater cut in expenses planned for 2022, the election year.

Until now, the economic team has already mapped the need to veto up to R$ 9 billion in expenses to recover other expenses that were underestimated in the Budget, as revealed by the leaf.

Of this amount, R$ 3 billion are needed to replace personnel expenses and R$ 800 million to increase the allocation of the electoral fund for campaigns, to comply with the LDO (Budget Guidelines Law). If that happens, the fund would return to the R$ 5.7 billion initially planned by Congress.

There is still a lack of R$ 5 billion in discretionary expenses, which include funding and investments, mainly in the Ministry of Economy, which suffered a 50% cut in appropriations.

If the government needed to correct the spending ceiling now, the scissors would need to be even more aggressive, a complicating factor in already tense negotiations behind the scenes of the government.

The political wing and the economic area continue in meetings this week to define the size of the veto to the Budget, which may be below the R$ 9 billion requested by the Economy. The deadline for the sanction is Friday (21).