By PAULO NOGUEIRA BATISTA JR.
The search for credibility leads to more rigid formulas, sacrificing the freedom of economic policy
The decision on the fiscal framework that will replace, by means of a supplementary law, the constitutional spending ceiling was postponed until April, after President Lula's trip to China. The decision to postpone the government's proposal seems correct to me. Why make a strategic decision, behind closed doors, that will affect fiscal policy over the next few years?
Remember that the government is continuing something very important approved in the transitional PEC. There, at the suggestion and writing of Minister Fernando Haddad himself, as he himself told me, an intelligent device was established that – a point not always noticed – effectively deconstitutionalized the fiscal framework, by predicting that the spending ceiling will cease to exist after it is approved the complementary law establishing a new fiscal framework. It is the elaboration of this complementary law that is under discussion.
Credibility versus flexibility
I am not aware of the alternative or alternatives elaborated by the Ministry of Finance, as everything has been conducted so far in secrecy. But the matter itself does not require secrecy. It would be better if an open debate on the subject were inaugurated, before President Lula forwards a proposal to Congress.
From a theoretical point of view, there is always a trade-offs, a dilemma between flexibility and credibility. The quest for credibility leads to more rigid formulas, sacrificing the freedom of economic policy. Conversely, rules that are too flexible tend not to build trust. This applies not only to the fiscal area, but also to the monetary and exchange areas.
Admitting that it is necessary or advisable to establish rules or anchors, is it advisable to follow rigorous models and seek credibility at all costs? It doesn't seem reasonable. I am among those who prefer flexible devices that do not stifle economic policy. The future is always uncertain and setting rigid rules ends up not being recommended in practice. Better to leave room for adaptations and revisions. Trust can be created and strengthened over time with the responsible execution of public policies.
In the field of public accounts, the role of a flexible rule is to help create confidence, without, however, preventing fiscal policy from playing its role as a central instrument of economic policy. Framework, not fiscal dungeon.
In the case of Brazil, flexibility is particularly important, since it is difficult to imagine a scenario of economic recovery and income distribution that does not involve an active fiscal policy, which includes increased investment in public investment and transfers and other expenditures. social. The fiscal framework that will please the financial market and the Central Bank, which corresponds to their expectations and prejudices, will hardly be compatible with an economic and social development program. One should not adopt rules that the financial market applauds as “robust” and then discover, over the years, that fiscal policy cannot do this, cannot do that, and has basically been handcuffed and immobilized.
A flexible and simple rule
My preference, as well as that of many other economists, in Brazil and abroad, is for flexible, simple rules that are not pro-cyclical, as are some types of anchors. In other words, it is better to adopt an easily intelligible fiscal rule or framework that allows for the adoption of countercyclical policies whenever necessary, allowing fiscal policy to be more restrictive in periods of excessive heating of the economy and more expansive in periods of recession or stagnation.
Such a fiscal framework could take the following form. Annual targets for the government's primary result would be defined, in advance, in the form of a band, with a wide distance between the floor and the ceiling. The law would predict that, in times of recession or slow growth, the result would be close to the floor; in times of high growth, close to the roof. The rule would therefore not be pro-cyclical.
Avoiding procyclicality is important. When the economy grows more vigorously, public revenues rise and certain types of expenditures decrease, such as unemployment insurance. The deficit is reduced, or the surplus increases, automatically. The reverse occurs when the economy slows down. The fiscal framework would have to be designed with these automatic effects in mind. And it should also leave some room for an active fiscal policy, capable of providing fiscal impulse or contraction, depending on the situation of the economy.
A band would meet these requirements. Fixing a single target for the primary outcome is no longer the case. In times of recession, for example, the primary result would automatically decrease, moving away from the established target. The government, in order to comply with what was established, would be led to cut expenses or increase taxes, reinforcing the recessive movement of the economy. An error would be, for example, to set a horizon for zeroing the primary deficit. If the economy continued to grow little or not at all, this type of objective would lead to recession and rising unemployment.
A band for the primary result has some other advantages as a fiscal policy target. First, the primary surplus or deficit is a known variable, with a long historical series. Second, it is an observed variable, and not constructed by models, as would be the structural primary result, for example, or adjusted to exclude cyclical effects. Third, it is an outcome over which fiscal policy has reasonable control, unlike public debt or the total fiscal deficit, which are more sensitive to other aspects of economic policy and to variables outside the government's control.
The simplicity of the rule is another advantage. A complex framework, with many devices, escape clauses and triggers, would make it difficult to understand the proposal and monitor its execution. It would also be easier to disfigure it during the course of Congress, as the complexity would open the gate to all kinds of extravagant ideas.
Every framework should also provide for rules in case of non-compliance with the rules. What would happen if the rule proposed here were not complied with? Here, too, it would be preferable to adopt simple procedures. In the event of a result outside the established band, the Treasury would send a detailed document to Congress, justifying the deviation, as the Central Bank does, in a letter to the Treasury, when inflation escapes the band in the inflation targeting regime. The Minister of Finance, just as the President of the Central Bank should do, would appear before Congress on a quarterly basis to provide explanations and respond to questions about the conduct of the policy and the fulfillment of the target.
Would the proposed framework be too flexible? I do not believe. After all, I ask, why would the fiscal regime have to be more rigid than the monetary one? Fiscal policy should, in principle, have the same treatment as monetary policy. This would even facilitate the harmonization of fiscal and monetary policies, desired by Minister Fernando Haddad. What is essential is that the rule or rules are reasonably flexible, simple and easy to communicate.
active tax policy
The challenge is to give some predictability to fiscal policy and gain confidence, without losing the essentials, that is, the flexibility to trigger social programs, public investments and tax reform. The Brazilian economy is experiencing a stagnation that has lasted ten years. It remains one of the most unequal countries in the world.
Does anyone imagine that it will be possible to redistribute income without resorting to spending and tax policies? Does anyone imagine that the recovery will come from the restoration of confidence in economic policy and the effects of this restoration on private sector consumption and investment? Increased confidence could at most help, bolstered by monetary policy easing.
Leadership must come from the State, the only agent capable of launching and coordinating the effort of economic recovery and income distribution. Active fiscal policy constitutes an essential lever that, aided by the mobilization of public banks and the review of monetary policy, will be able to achieve the often postponed objectives of pulling the economy out of doldrums and creating a fairer country.
*Paulo Nogueira Batista Jr. he holds the Celso Furtado Chair at the College of High Studies at UFRJ. He was vice-president of the New Development Bank, established by the BRICS in Shanghai. Author, among other books, of Brazil doesn't fit in anyone's backyard (LeYa).
Extended version of article published in the journal Capital letter, on March 24, 2023.
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