The new version of the Fiscal Framework

Image: Harrison Haines


The substitute for rapporteur Cláudio Cajado and the fight in defense of public services

The New Fiscal Framework (NAF) was approved by the Chamber this Wednesday, May 25, in the form of a substitute for the project originally presented by the Executive (PLP-93/2023). The project was originally presented by the Executive – as determined by the “PEC da Transição” (EC-126/2022) to replace Michel Temer’s “Expenditure Ceiling” (EC-95/2016). The rapporteur of the substitute approved in the Chamber, deputy (Bolsonarist and linked to Centrão) Cláudio Cajado, made the project more fiscalist and draconian against social spending than the original presented by Minister Fernando Haddad in late April.

The approved text – and sent to the Senate – maintained the same principle of linking the growth of primary expenses (all, except interest on the debt) to the growth of revenues. But it imposed new, stricter, comprehensive and permanent rules. The Chamber's project is still, of course, a little less fiscalist than Michel Temer's “Ceiling”. But – if it is not changed in the Senate due to social and union movements – it must maintain a very dangerous obstacle to development, growth and income distribution in the country by attacking investments, services and public service. Thus, he could politically compromise the Lula government itself, whose popularity (necessary to combat Bolsonarist fascism) depends on spending on social and development programs.

Pressures and it gets worse with each version

The first draft of the New Fiscal Framework, announced to the press in early April by Minister Fernando Haddad, defined that in order to meet the primary surplus targets (according to FHC's Fiscal Responsibility Law – LC101/2000), the government subject to a rule with two simultaneous barriers.[I] Primary expenditure growth is limited: (i) to annual growth between 0,5% and 2,5%; (ii) 70% of revenue growth in the event of compliance with the primary surplus target and 50% in case of non-compliance.

The surplus targets presented by the government for each year of its mandate are 0,5%, 0%, 0,5% and 1% of GDP – with a margin of 0,25 pp above or below.

As the New Fiscal Framework replaces EC-95, health and education items are no longer frozen by it and are again constitutionally linked to (respectively 15% and 18% of) budget revenue. But as such expenses are part of the global amount limited by the above rule, some will compete for space with others; and, therefore, its liberated growth must mean less space for all other primary expenditures, including those in other social areas or expenditures with personnel even in the liberated areas.

The PLP-93 also exempted from the rules expenses funded with own revenues in the case of universities, research institutions and state-owned companies. Furthermore, in Fernando Haddad's original proposal, expenses with some urgent social programs and investments (maintenance/construction/renovation of buildings, equipment and public infrastructure) had also been exempted from the limiting rule. Since the latter could still have their endowments (a little) boosted by possible leftovers (surpluses) of the primary surplus of the previous period.

However, despite the conservatism (albeit more realistic and flexible than the Ceiling) of its presented draft, the Ministry of Finance was attacked by the “markets”, which demanded further cuts in spending. Thus, a few weeks later, Minister Fernando Haddad ended up sending Congress a version (PLP-93) that was even more tax-oriented. It (a) included investments (capital contributions) in public banks in the submission to such rules and (b) limited to a maximum of R$ 25 billion the “turbinamento” (excess of the surplus that could be reused) to investments.

But that did not lessen the anger coming from the mainstream media, spokespersons for finance, and even the IMF – whose representative expressed support for the Framework, although demanding “a more ambitious adjustment effort” in spending when meeting with Fernando Haddad and with congressmen on the eve of the presentation of the substitute in the Chamber. There was also great pressure coming from the reactionary and anti-social majority of Congress – remember, with a vast majority of physiologist parliamentarians linked to Centrão and a “root Bolsonarista” bench with about 20% of the seats. It was in this context that the “urgency” regime of urgency in the processing of the PLP was approved.

Centrão-Bolsonarist version attacks social spending and investments

And it was precisely there that the Chamber – by approving the substitute Cajado – made the – already restrictive – proposal presented by the Executive to Congress much more draconian: (1) The text approved by the Chamber included FUNDEB (although expenses already contracted to the next years were included in the limit, which was slightly extended), the FCDF and the transfer of the nursing floor in the calculation of the Framework limit rule. Spending on such programs was free of limitation not only in the Haddad Framework, but even in the Temer/EC-95 Teto itself.

(2) Other urgent social expenditures that were free of limiting rules in the Executive's original proposal were now also submitted to them by the rapporteur: he forced inclusion in the limitations, for example, of Bolsa Família itself. The only thing he didn't subject to those rules were expenses (social security) with the real increase in the minimum wage (in addition to health and education). It is worth remembering that there is still no supplementary law that guarantees the readjustment of the Minimum, therefore, not even its readjustment is guaranteed for the time being.

(3) In addition to keeping capitalization expenses of public banks subject to the limiting rules (already included in the Executive's original PLP), the rapporteur also submitted to such limits the capitalization of non-financial state-owned companies (Petrobras etc). Thus, according to its Replacement, such state-owned companies will have to compete (with social programs) for the meager space in the Union Budget – limited space, no longer by the Temer Ceiling, but by the rule (described above) of the Framework.

(4) In addition, the approved Substitute restricted the use of surplus surplus (turbination) in investments to only 70% of such surplus. This, in addition to maintaining the existing restriction in the Haddad proposal of limiting such use to R$ 25 billion, except that now, instead of that monetary amount, the limit is 0,25% of GDP - a subtle change that, although in today's values ​​are the same, it is pro-cyclical as it weakens recovery policies when, in recession, this limit relative to GDP tends to decrease in monetary terms. The investment floor was also stipulated at 0,6% of GDP in each budget. Which, in the case of LOA 2023, is already R$15 billion less than what was foreseen there – reducing the base of the initial amount of expenses on which they will be readjusted in the following years.

(5) the framework rules described above – (i) and (ii) – become permanent – ​​not only valid until 2027, as in the original proposal. However, the Chamber's text modified rule (ii) by eliminating the expenditure growth floor (50% of revenue growth) in case of non-compliance with the Surplus target.

Attack on functionalism back

Instead of such a floor, the rapporteur reintroduced the Teto Temer spending guillotines (EC-95) to be activated when the surplus target is not achieved or when constitutionally mandatory expenses exceed 95% of total expenses.

Thus, according to the text of the New Fiscal Framework approved by the Chamber - as well as by the Ceiling -, if the guillotines are activated, any real increases in mandatory expenses, civil servants' salaries, hiring and carrying out of competitions or career restructurings (which imply an increase in of personnel expenses), in addition to the expansion of subsidies or tax incentives. It is true that this text of the New Fiscal Framework allows the President of the Republic to send a “message” and bill to the National Congress in the event of triggering such obstacles. But embarrassment prevails in any case.

(7) The New Fiscal Framework of the Chamber tightened the guillotine hole a little more by removing from the total collection to be considered in the calculation of the limits for expanding expenditure, the funds for the fiscal recovery of the states and the unrequested PIS/PASEP balances . Income from dividends, concessions from the State, as well as from the exploitation of natural resources were already outside the global amount of income in the PLP-93, the Executive's original. Although sources of primary revenue, they will be used to amortize the public debt.

Even more so with such withdrawals, the probability of mandatory expenses reaching 95% of totals is not small. They should reach 90% and 91% respectively in 2023 and 2024 according to the PLOA forecast.

(8) Finally, in non-compliance with the primary result and the collection targets of the LDO, the text maintains the mandatory contingency of discretionary expenses in budget execution in up to 25% of such expenses foreseen in the LDO.

It is clear here that the anger against public services, social spending and, above all, against civil service, guided the action of the Bolsonarist rapporteur (and the Centrão that supports him) in the elaboration of such a substitute. Even in its initial version, the NAF would already restrict the government's ability to carry out public policies, both social and those aimed at socio-economic development. Furthermore, linking expenses to revenues at a time when these are depressed (given the recession-stagnation the country went through between 2015 and 2022) is extremely irresponsible. And, as seen, the version approved by the House is much more drastic in this sense.

The “Tax Anchor” Fallacy

Robust growth in social spending and public investment is essential for improving income distribution as well as for the country's development and reindustrialization effort. By preventing such growth, the Spending Ceiling imposed a brake on the country's future. The ultra-limited countercyclical provisions of the New Fiscal Framework are not capable of reversing such a disastrous trajectory. To get an idea of ​​what this will mean, one can look back and do a comparative counterfactual exercise. Figures 1, 2 and 3 show what would have happened to social and investment expenditures carried out in the Lula I, II and Dilma I governments if the NAF had been implemented since 2002? Figures 1, 2 and 3 show this.

Figure 1 - Increases in primary spending: actually carried out and if the NAF were in force

The various social programs developed during the Lula I and II and Dilma I governments were only possible with the expansion of primary spending. If the New Fiscal Framework had been implemented since 2002, such growth would have been reduced to less than a third, making practically all the most relevant initiatives unfeasible. It is true that in recession years (2003, 2009, 2011 and 2015-19), the New Fiscal Framework would guarantee minimal growth. But the countercyclical mechanisms, which were already palely shy in the original proposal and which were even more pasteurized in the version approved by the Chamber, are incapable of compensating for the damage done in the more prosperous years, much less of reversing the declines in aggregate demand in the years of crisis. .

Figures 2 and 3 - Evolution of primary expenditures (R$ and % GDP): realized and if the NAF or Ceiling were in force

Figures 2 and 3 show the considerable difference in the amount of primary spending accumulated over the years if the NAF were in force. In the case of the Ceiling (EC-95) and even the NAF, there would be a drop in such expenditures as a proportion of GDP. That is, social policies would have shrunk strongly in view of the size of the economy.

But let us remember that economic activity itself would be held back by such restrictions. This is given the inducing role of income and accumulation provided by these social expenditures and public investments. Therefore, one has to ask: is a “fiscal anchor”, whatever it may be, really necessary?

The bogus “debt stabilization adjustment” argument

The discourse presented by the mainstream media, bankers and conservative politicians in favor of curbs on public spending is based on two arguments. First, the Brazilian public debt would be very high and explosive. Second, cuts in social spending would reduce indebtedness and stabilize (neutralize the explosiveness of) its dynamics. Both arguments are fanciful and fallacious.

Figure 4 shows two measures of Brazilian public debt: the gross and net Debt/GDP ratio – the difference between them are the assets held by the government, such as the Central Bank’s International Reserves – of the general government (central government, states and municipalities). Firstly, it is not true that such debt is so high, especially when compared to other countries. Second, note that it is not explosive. Although it rose in the period 2015-19, it fell again, showing signs of stabilization.

This debt is almost entirely in reais (since Brazil is an international creditor – that is, it has negative net external debt), a currency that the country can issue sovereignly. Of course, that doesn't mean you can issue currency."at will”, as there are economic restrictions to this. But there is much more room for maneuver – proportional to the (re)introduction of regulation on financial markets and capital controls – in relation to a country with net foreign debt.

Lastly, and most importantly, it is false to say that primary spending increases debt, as I tried to show in the article posted on this site  “Transition budget and social spending”. What actually raises it are spending on debt interest and low (or negative) GDP growth and low tax collection – especially in a country with strong tax regressivity. Primary expenditures, especially social and infrastructure investments, have high multiplier effects. That is, in the medium to long term (depending on the expenditure and the period – more or less recessive), they induce an increase in GDP growth and, therefore, in tax collection.

This, over the following quarters, completely or partially neutralized the initial primary deficit. The greater the multiplier of the type of expenditure and the lower the average interest rate on the securities debt, the more completely such neutralization will be – to the point that certain expenditures are not only self-financing, but even reduce the debt/GDP ratio.

Figure 4 – Evolution of the Brazilian public debt

Figure 4, in a way, confirms this. Good GDP growth, driven by the commodities boom, but also helped by social spending during the Lula I, II and (less) Dilma I governments, led precisely to the fall in debt between 2002 and 2014. The successive fiscal and monetary adjustments between 2015 to 2019 – Levy Plan, Spending Ceiling, Guedes cuts – these indeed helped raise the debt/GDP ratio. As of 2020, the emergency programs voted on by Congress (initially against the will of Bolsonaro/Guedes, but intentionally maintained by them already on the eve of the 2022 election), created strong multiplier effects that allowed, in the following quarters, to at least partially recover GDP and revenue, leading to a drop in the debt/GDP ratio.

President Lula, more than once in recent months, had to respond to media criticism by stating that during PT governments there was no spending ceiling (nor “frameworks”) and indebtedness fell. With good reason: Technically and economically speaking, there is nothing that justifies any kind of fiscal “anchor” or “framework” that reduces social spending. There is no reasonable explanation – whether theoretical or empirical – that supports this New Fiscal Framework. Nothing, at least, that is favorable to the Brazilian people and the country as a nation in the short or long term.

Large speculators demand this because they want to obtain the maximum amount of guarantees and resources to pay interest in the shortest possible time. The enormous pressure and political blackmail that they and their media and congressional/institutional instruments exert (even more so in the environment of coup instability) is what explains the fact that the Lula government accepted to buy the pill of the New Fiscal Framework in exchange for some stability – probably illusory. The problem is that this pill tends to erode popular support, creating far greater political risks.

*Alberto Handfas He is a professor at the Department of Economics at Unifesp..


[I] The objective of forcibly running primary surpluses – income above expenses, except for interest on the debt – is precisely to guarantee the payment of such interest at the expense of the nation's social and development policies. Bearing in mind that interest expenses are not subject to any restriction, growing whenever the Central Bank and “the markets” deem it necessary.

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