Walking on thin ice



Brazil's new fiscal framework and its antecedents.

The day after the government announced the New Fiscal Framework (NAF) proposal, I wrote on a social network that the team from the Ministry of Finance had managed to reconcile a fiscal policy design that was not completely averse to the (financial) market with the necessary space to fulfill Lula's campaign promises, mainly those associated with social policies. I highlighted, however, that the brilliant proposal was designed within a straitjacket that we didn't need to be wearing.

A few days earlier, at a development seminar promoted by the National Bank for Economic and Social Development (BNDES), the well-known Indian economist Jayati Ghosh said that Brazil was a masochistic country, since, without net external debt, with low internal debt and without IMF requirements, it had a very high interest rate and self-imposed the task of generating primary surpluses in the midst of so many social demands and the need to increase public investment.

The unusual aspect of the situation, which, in her perplexity, the economist, without finding another plausible explanation, attributed to a supposed masochistic trait of the national character, derives precisely from the fact that, a few decades ago, we were forced to wear tight clothing and continued to do so. wearing it, despite the chance we had to tear it and which we didn't know how to take advantage of.

It's a little bit of the story of how we got to this situation that we intend to bring here. This story had a decisive chapter with the impeachment of President Dilma Rousseff and the Michel Temer-Jair Bolsonaro period that followed. This chapter covers, among other elements, the very peculiar conditions that allowed the defeat of Jair Bolsonaro, but not Bolsonarism (very broad front, concessions to the financial market, parliamentary physiology, etc.), the need to negotiate with an ultra-conservative Congress and which exhibits growing political power (increased by the impeachment process itself), due to the exponential strength that the liberal economic project and the dominance of financial wealth has gained in our society, and due to the urgency of repealing the bizarreness of a fiscal rule sheltered within same as the Federal Constitution (CF).

As soon as it was announced, the New Fiscal Framework received a barrage of criticism. From the liberals, including the mainstream media, for allegedly having too much confidence in the recovery of state revenues and not properly worrying about “cutting expenses”. From the left, because it was seen as a new ceiling, weaker perhaps, but still a ceiling, restrictive to the expansion of public spending, especially public investments. Regardless of the analysis we can make of the New Fiscal Framework as an instrument of economic policy per se, it is only in the context previously summarized, and with the position of its antecedents, that it makes sense to discuss it.

It is, therefore, about rescuing the history of austerity in Brazil which is, simultaneously, the history of financial dominance, which is accompanied by the chronic weakening of Executive power, together with a sort of rarefaction of democracy that is in full swing , and to which we will return later.

Wearing a straitjacket

On December 15, 2016, just four months after the coup that removed Dilma Rousseff from power without a crime of responsibility was completed,1 Constitutional Amendment 95 (EC 95) was promulgated by the National Congress. Its objective was to change the transitional provisions of the 1988 Constitution to establish a new fiscal regime, popularly known as the “spending ceiling”. Rigidly formatted, the amendment froze, in real terms, current expenditures and federal public investments for the next 20 years.

The deposition of the former president as a condition sine qua non for the approval of the draconian EC 95 was indirectly admitted by Michel Temer himself, former vice-president who had assumed greater power with Dilma's impediment. Despite the official narrative that the dismissal was due to “fiscal fraud” (the supposed crime of responsibility), at a meeting at the Council of the Americas (Council of the Americas) in New York at the end of September 2016, Michel Temer recognized, clearly, that Dilma Rousseff had been removed for not having agreed to the application of the “Bridge to the Future” program to the country, an ultraliberal libel drawn up by the PMDB,2 Temer's political party.

Supposedly intended to “preserve the Brazilian economy and make its development viable”,3 the document listed a series of initiatives that, together, formed a pure-blood liberal program, that is, without the social trappings of the Workers' Party (PT) programs. Among them were all the changes necessary to establish the spending cap (even though such an expedient did not appear there under that name). At his side were, among other elements: the end of constitutional links between education and health, free labor negotiation, total outsourcing, the tightening of rules and capitalization of social security, unfettered privatization and full commercial freedom (making blank slate of Mercosur, Brics, etc.).

The approval of the spending ceiling at the end of 2016, as already mentioned, was just a chapter in a story that had begun long before. The New Fiscal Framework, approved by Congress and sanctioned by President Lula on August 30, 2023, which replaced it, is also an unequivocal part of this story. A little looser than the previous straitjacket, this new outfit is, however, still very tight. How did we get to this?

The circumstances that forced us to start wearing this uncomfortable outfit go back to the 1980s, when Brazil became insolvent in terms of dollars due to the repeated oil shocks and, above all, the financial blow that the United States dealt to the world in 1979. with the quadrupling of its interest rates. The high level of external debt when the country was hit by the extortionate interest rates of the “strong dollar policy”4 It arose from the military government's need to address the external imbalance caused by the first oil shock in 1973, without harming growth too much, which had been moving at the pace of the “miracle”.

At the same time, the country was providing an enormous service to a growing international financial wealth that was eager for investments, in the context of a global crisis scenario. As the contracts had been stipulated, for the most part, at floating rates, the superlative increase in interest rates broke the country (as well as several other countries in Latin America). From then on, Brazil faced a decade and a half of very high inflation and had to submit to the dictates of the IMF.

After meeting some demands from international creditors (securitizing external debt, opening the private and public securities market and continuing the financial opening of the economy, with the gradual removal of controls on the free flow of capital), the country managed, in the first years of the 1990s, resolve the issue of external debt, pending since the 1987 moratorium, thus unlocking the international credit market.

The return of capital to Brazil enabled the success of the Real Plan which, after many other frustrated plans over 15 years of uninterrupted inflationary pressure, was successful in achieving monetary stability in our economy.5 Launched in 1994 and prepared by the economic team of Fernando Henrique Cardoso (FHC), then Minister of Finance, the Real Plan, however, was not just a stabilization plan. He also brought with him the intention, explicit in FHC's government (1995-2002), of embracing liberal dogmas (as listed at the time by the so-called Washington Consensus) and transforming the country into an emerging financial power.

Thus, anchored in monetary stabilization, other measures were taken, with FHC now President of the Republic, aiming to transform the country into a safe haven for the appreciation of international financial wealth, the volume of which was increasing rapidly. This led to the granting of tax exemptions for financial gains by non-residents, legal changes to provide more guarantees to the rights of State creditors, a pension reform to cut public spending and open the pension market to private capital, a monetary policy with very high interest rates real6 and, as expected, the tireless search for large primary surpluses.7 This is where, so to speak, officially, the history of the country began inside these too-tight clothes.

However, the belief that domestic growth could be fully supported by foreign savings proved to be chimerical, definitively freeing the country from the recurring external crises that marked its history. In January 1999, as a result of the crisis that had first hit Asian countries (Thailand, Indonesia, South Korea and Taiwan) and then the Russian economy, Brazil faced a strong exchange rate crisis, huge loss of currency, and once again resorted to the IMF.

As a result, not only did the country experience a period of mediocre, if not recessive, growth, but there was a substantive change in economic policy. Instead of the fixed exchange rate, one of those responsible for the crisis, given the exchange rate populism operated by FHC in the previous year with a view to his re-election, the floating exchange rate regime was adopted, and, along with it, the inflation targeting system. It was only then, in reality, that the country's costume as a candidate for emerging financial power was completed, as the control of monetary policy was no longer carried out via the exchange rate, but rather through the targets regime.

Among the precepts dear to the so-called Washington Consensus, which guided our post-Real Plan macroeconomic policy, was the adoption of an exchange rate regime with a single rate and defined by the market, that is, a floating exchange rate regime. However, the fixed exchange rate was the guarantor of the success of the new currency, which was kept overvalued and became FHC's greatest political asset. Only after being re-elected,8 Driven by the great crisis of December 1998/January 1999, FHC changed the exchange rate policy. The two new elements (floating exchange rate and inflation targeting regime) combined with the imposition of always positive primary results to constitute the famous macroeconomic tripod, which to this day shapes the environment in which economic decisions are taken in Brazil.

Thus, if the unconditional adherence to the recommendations of the Washington Consensus was a kind of baptism of the Brazilian economy in the heavy waters of contractionary fiscal policy, the replacement of the old “exchange rate anchor” by the “monetary anchor” (regime of targets and primary surpluses) submerged the country in this cloudy atmosphere once and for all, making the new outfit even tighter. So tight that even the rise to federal power of a president and a party forged in the daily struggle to improve workers' living conditions changed almost nothing in this story.

At the beginning of Lula's first administration, the current macroeconomic parameters were even deepened: an even greater increase in the interest rate, reaching 26,5% per year in March 2003, an enormous monetary squeeze, with a cut of around 10% in the means payment for the economy and, above all, the adoption of a primary surplus target greater than that required by the IMF itself. In the last agreement, signed in June 2002, the primary surplus target agreed was 3,75% of GDP and Lula, having to kiss the cross with more fervor for people to believe in him,9 voluntarily raised the target to 4,25%.

Over time, PT governments have differentiated themselves from their predecessors because, combined with the continuity of this liberal agenda10 and with the primary surpluses, which continued to be produced, high-impact social policies were adopted, capable of reducing inequality and practically extinguishing absolute poverty, in addition to allowing, among other things, access to higher education for millions of young people from the lowest-income families (mainly black). The commodity cycle of the 2000s, which benefited Brazil enormously, was the decisive element in the then existing possibility of reconciling the tight clothing that the country continued to wear and the public policies that were being implemented.

But the commodities boom produced yet another auspicious result: the substantial increase in the country's foreign exchange reserves, which grew more than five times, jumping from US$35,9 billion in December 2001 to US$180,3 billion in December 2007. XNUMX. In this new situation, not only had the country definitively resolved the problems with its external creditors, but it had also regained precious degrees of freedom in the conduct of economic policy, no longer depending on the IMF and being able to throw away that uncomfortable outfit once and for all. However, to achieve this, it was necessary for the country to have a project capable of redesigning the parameters of its insertion in the international division of labor, of increasing productivity and generating better quality jobs. 

The project, however, did not exist. Lula's government, re-elected in 2006, sought to eliminate poverty and reduce inequality, but without changing the legal, institutional and socioeconomic frameworks that gave prominence to wealth and financial interests. Furthermore, almost two decades of very high real interest rates (almost always the highest in the world) and an overvalued exchange rate — measures in line with the project of transforming Brazil into a financial power — prematurely deindustrialized the country, causing a setback in our productive matrix, which had become increasingly rely on low-value-added activities (agricultural and extractive).

Even the Growth Acceleration Program (PAC), launched by Lula in the first days of his second administration (January 2007), was, in this sense, a timid initiative, mere recognition of the powerful multiplier effect of product, income and employment driven by investments public. Could the process of rescuing the Brazilian State's autonomy in economic conduct have evolved and consolidated since then? Without a doubt, but the great financial crisis was already breaking out at the international level, shuffling the cards once again and, in the end, transforming our tight fiscal clothing into a true straitjacket.

Initially circumvented by subsidies for sectors with the greatest multiplier effect (cars and household appliances) and by an aggressive expansion of consumer credit, the crisis worsened at the beginning of President Dilma's first term. The period coincided with the worsening of the financial crisis in countries on the periphery of Europe, which had serious consequences for all world trade, negatively affecting the external component of our aggregate demand. To face the new situation and, at the same time, try to reverse the deindustrialization process, the government launched the “Bigger Brazil” plan, aiming to strengthen exports and increase the competitiveness of the national industry also in the domestic market.

In addition to strengthening BNDES subsidized credit for investments and exporting companies, it was expected to reinstate taxes in return for foreign sales, tax exemption on the acquisition of machinery and equipment, and payroll relief for sectors that were large employers. of labor. Local content policies for certain sectors, such as vehicles, machinery and medicines, were also activated.

Alongside these measures, together with measures to control the international flow of capital, a process of monetary relaxation aimed at reversing the appreciation of the real and a policy of intervention in administered prices (fuel, energy) to contain the impacts began. inflationary consequences of exchange rate devaluation.

Finally, to face the noisy “anti-spending” discourse that claimed it was necessary to compensate for the tax expenditure resulting from the exemptions and reliefs of the “Brasil Maior” plan, a substantive tightening of fiscal policy was carried out, particularly affecting public investments, which had been accelerating since the launch of the PAC. The real average growth rate of central government investments fell from 26% per year in the period 2006-2010 to 1,8% in Dilma's first term.11

But the bet didn't pay off. The lack of response from private investment (the tax break granted to companies had been transformed into increased profit margins), the cut made in public investments to accommodate exemptions and exemptions, the exhaustion of impulses derived from consumption and the continuity of the external crisis , with a huge reduction in the price of commodities exported by the country, began to produce disastrous results from the point of view of growth, culminating in a rate of 0,52% in 2014, the last year of Dilma Rousseff's first administration.

Furthermore, the advent of taper tantrum in the USA from 2013 onwards, with speculation surrounding the stagnation of the quantitative easing, brought even more uncertainty, which led to a worsening of external accounts. This caused the country, for the first time since 2002, to lose reserves (US$14,4 billion less), thus interrupting a period of impressive increases, which had taken foreign exchange stocks from US$35,9 billion in 2001 to more than US$370 billion in 2012.

The worsening of the economic scenario led to turbulence in the political scenario, causing the country, after the demonstrations in May/June 2013, to head divided towards the 2014 presidential elections. Two models were in dispute: on the one hand, the attempt to , even in the midst of the crisis, continue the conciliatory strategy; on the other, the search to rescue in total the liberal agenda and break with this arrangement. Dilma Rousseff's narrow victory and the economic terrorism practiced by the major corporate media led the president to a mistaken attempt to please the market, bringing, in 2015, to command economic policy, a leader from the financial sector: Joaquim Levy.

Joaquim Levy's orthodox turn, with the sole and exclusive goal of improving the primary result (a brutal cut in the PAC – R$ 58 billion, corresponding to 1,1% of GDP –, a sudden readjustment of administered prices, continuous increase in the rate basic interest rate), led to an immediate worsening of the scenario. The resumption of orthodoxy combined, for an even worse outcome, with the deleterious effects of “Operation Lava Jato” on key sectors for the gross formation of fixed capital, such as oil and civil construction, and with the bomb tariffs12 that an increasingly powerful Congress imposed on the Executive, increasing the country's political-economic instability. The 2015 results were terrible: GDP fell 3,6%, inflation surpassed the 10% annual barrier and the primary result was negative at 2,1% of GDP – much worse than the negative 0,56% in 2014 and that it had caused so much noise in the media.

The gloomy economic environment transformed the political unrest, which had been simmering for two years, into a real fire, bringing to the ashes not only the president's mandate, but the fleeting possibility of recovering our autonomy and finally getting rid of the distressing clothing that we were forced to wear. dress for a quarter of a century. Along with the 2016 coup came Michel Temer's buffer mandate and the infamous spending cap, the most characteristic chapter in Brazilian history in the poisonous waters of austerity and the dominance of financial interests, with which we open these reflections. After Temer's term ended and with Lula in prison, Jair Bolsonaro arrived, the fascist cloud and the ultraliberalism of Paulo Guedes, an early defender of the fiscal garrote.

It should be noted that the adoption of the spending ceiling did not fill an empty space, as if there had been no domestic mechanism capable of exercising any type of control over public accounts, in addition to the IMF's pressure mechanisms in periods in which the economy was subject to his command. On the contrary, the CF already provided, for example, the so-called “golden rule”, which prohibits the Executive from taking on debts to finance current expenses, causing the public entity to commit a crime of liability in the event of disobedience.

Furthermore, since the adoption of the tripod in January 1999, the need to produce positive primary results has become a cornerstone of the current macroeconomic regime. This principle was reinforced the following year, with the approval of Complementary Law no.o. 101/2000, which criminalizes the manager who contradicts it. Known as the Fiscal Responsibility Law (LRF), it establishes limits and conditions for personnel expenses and revenue waivers, as well as requiring the establishment of annual targets relating to revenues, expenses, primary and nominal results, and the amount of debt of each federative entity.

That said, and given the very comfortable situation both from an external point of view (at the end of 2016 the country had no pending issues and accumulated US$365 billion in reserves) and from the debt/GDP ratio (which did not reach 70%,13 when that of developed countries such as the USA, the United Kingdom and Japan was in the order of 100% or more), the spending ceiling was an unnecessary, not to say criminal, additional imposition of enormous severity, which finds an obvious explanation at the ideological level, but which also indicates the clear elective affinity between, on the one hand, the political forces that combined to unseat Dilma and, on the other, the increasing weight of interests linked to financial wealth and rent-seeking, in a permanent struggle in favor of policies of austerity.

The economic terrorism that has accompanied us since monetary stabilization, mobilizing various ghosts (return of inflation, external crisis, explosion of internal debt, etc.), always with the aim of forcing the Executive branch to adopt measures to the liking of the financial market, has risen level of attacks on Dilma, when, at the end of 2014, the primary result was negative at 0,56% of GDP. Being much more a product of the slowdown in GDP than of an uncontrolled explosion in public spending, the deficit was one of the main arguments weakening Dilma, already quite weakened politically by her narrow victory at the polls. It is also not a mere coincidence that the crime of responsibility (not proven) attributed to Dilma was that of “tax pedaling”;14 The now dizzying rise of fiscalist ideology that would culminate in Michel Temer's spending cap was evident.

But Dilma Rousseff's impeachment also revealed another factor of fundamental importance in the creation of the very thin layer of ice on which economic authorities walk today: the progressive power of the Legislature – leading some experts to talk about the existence of a semi-presidentialism or a house-style parliamentarism, without a prime minister or the prerogative of dissolving Congress – and, along with it and associated with the dominance of financial interests and liberal precepts (such as the obsession with positive fiscal results), a sort of rarefaction of its own democracy. Temer's rise would throw a lot of water into this mill, as the new president submitted himself fully to Congress, making the balance of power between the Executive and Legislative branches increasingly tilt towards the latter.

Walking on thin ice

President Lula's victory in the 2022 elections, albeit by a minimal and smaller margin than initially predicted, removed from the scene, at least for now, the dismal horizon of ultraliberalism and fascist terror. Given the spending cap and the anarchy established by Jair Bolsonaro in public accounts in the last year of his term, trying to be re-elected, there was an urgent task for the government that would take over in 1.o January 2023: negotiate with Congress a fiscal break for that year, capable of allowing Lula's most notorious promises, especially those relating to Bolsa Família (R$600 per family per month, plus R$150 per child up to 6 years old ), could be fulfilled right from the start.

Under the auspices of the broad front that had been formed to defeat Jair Bolsonaro, but also due to the competence and tenacity of the transition team constituted by the new government, the negotiations were extremely successful. The discussion surrounding the so-called Constitutional Amendment Proposal (PEC) of the Transition (which the mainstream media soon named the “spending PEC”) resulted in Constitutional Amendment 126. Approved and promulgated by Congress on December 21, 2022, the Amendment authorized an extra-ceiling expenditure of R$145 billion in current expenses in 2023 (around 1,5% of GDP). Expenses with investments related to excess revenue in the previous year were also excluded from this limit, as long as they were limited to R$23 billion. Furthermore, an agreement was reached between parliamentarians and the transition team to remove fiscal policy from the Constitution.

The price to be paid for all this, in addition to the increase in the amount of resources to be allocated to parliamentary amendments, was the promise to replace the constitutional fiscal shackle with a new expedient, in the form of a Complementary Law (LC) project,15 to be sent to Congress by the new government by August 31, 2023. This is the seam that made the New Fiscal Framework viable – clothes, as we will see, still very tight and which, we repeat, we would not need to be wearing. It is, in any case, much more intelligent and – importantly, more flexible than the pernicious ceiling, whether from an economic or legal point of view (given that it is outside the Constitution) 

Let's look at the fundamental elements of the New Fiscal Framework, as approved (LC 200/23, of August 31, 2023), to then speculate about the existence (or not) of political space for something very different. We will thus return to the question of the relationship between economic policy and the rarefaction of democracy that we alluded to at the end of the previous section.

The first important and differentiating expedient in the proposed and approved design is the existence of bands for the primary result. Instead of a precise figure for him, as a proportion of GDP, there is an interval around a target (ranging from minus 0,25% to plus 0,25%), within which the values ​​obtained are considered satisfactory. . As the Executive does not have full control of the figures involved (collection, for example, depends on the performance economy as a whole), flexibility is welcome.

The second element to highlight is a countercyclical device that limits, in both directions, the real growth of primary expenditure. Thus, according to LC 200/23, such expenses must grow annually, in real terms, at least 0,6%, which guarantees a minimum of resources to cover the inescapable expenses with the maintenance of the public machine, even if , in a period of crisis, revenue is falling. On the other hand, in a good period, in which revenue is expanding at high rates, real expenditure growth is limited to 2,5%, and in the case of a primary result above the band, the surplus may be partially used for investments in the following period. A common criticism of procedures that seek to institute controls on public spending is their naturally pro-cyclical nature. The NAF seeks to overcome this problem.

Finally, given that all this accounting-fiscal-budgetary engineering is supposedly intended to maintain public debt at sustainable levels, there is a clause (item I of the caput of article 5o of LC 200/23) which limits the real growth of primary expenses, in a given year, to 70% of the real variation in primary revenues in the 12 months ending in June of the previous year, and failure to meet the primary result targets lowers this limit to 50%. By making expenditure always grow at rates lower than revenue, it is guaranteed that, at least from a fiscal point of view, there will be no pressure on the debt/GDP ratio to grow.16

Combined with the countercyclical mechanism already presented, the last rule, considered the 70% limiter, means that, even if revenue grows, in real terms, below 0,86%, expenses must grow at least 0,6% in same terms. On the other hand, even if revenue grows, in real terms, by more than 3,57%, expenses cannot grow by more than 2,5% in the same terms. Respecting these guidelines, the NAF spending limit is not determined in absolute terms, as in the old ceiling, but established based on the behavior of revenues, which seems much more logical.

As a whole, the New Fiscal Framework is a much more versatile and reasonable instrument than the discredited spending ceiling, but, even so, a very tight outfit, which, it is worth repeating, we would not need to be wearing if the coup had not occurred. 2016, Temer’s “bridge to the abyss” and, subsequently, Jair Bolsonaro’s fascist threat, married to Paulo Guedes’ ultraliberalism. Therefore, evidently, what was required of the office to replace the ceiling was something from the same family, that is, a mechanism that included locks, limiters and systems for adjusting public spending. In terms of design, therefore, it does not seem reasonable to assume that there was room for something more progressive (we will return to the issue of space later).

In any case, the most elaborate criticisms of the New Fiscal Framework17 What really touches on the value of the parameters: the target of zero primary result for 2024, the spending limiter of 70% of the revenue variation; and the lower and upper bars (0,6% and 2,5%) of the countercyclical mechanism. These are criticisms that make sense. In fact, the goal of zero primary result for 2024 seems quite ambitious, as well as the spending limiter seems a little too restrictive, in addition to both the lower bar and the upper bar of the countercyclical mechanism being very low.

However, it is worth remembering that, unlike the old ceiling, included in the Constitution and requiring PECs for its amendment (Bolsonaro, for example, had to propose several PECs aiming to break the ceiling — for emergency aid during the pandemic, to avoid paying court orders, etc.) , the parameters under discussion are all established in infraconstitutional legal instruments, that is, in ordinary law, such as the primary result targets, or, at most, in complementary law, such as the lower and upper bars of the countercyclical mechanism, the size of the bands of the primary result and the spending limit. In the case of these last two (bands and limiter), it should be noted that, in the project originally sent by the executive to Congress, their values ​​would be established each year by the Budget Guidelines Law (LDO), an Ordinary Law, but the Legislative branch did not accept the proposal and placed the parameters in the complementary law that established the New Fiscal Framework.

This change, as well as many other changes designed to produce, based on the Executive's proposal, a fiscal regime design that is as restrictive as possible for the government's actions, highlights the growing strength and weight that the Legislative power has been acquiring in the country. In an interview he gave to the website the earth is round, posted on January 8, 2024, political scientist and professor at the University of São Paulo (USP) André Singer stated that, at least since 2015, “it seems that Congress, more specifically the Chamber of Deputies, has been heading in the direction to govern Brazil.”

According to André Singer, since Eduardo Cunha (2015-2016), the presidencies of the Chamber have always followed one another under this brand. For example, at the time of Rodrigo Maia (2016-2021), the trait was so evident that there was even talk of “white parliamentarianism”. In article written by four hands at the end of 2023, the same André Singer and Fernando Rugitsky assert that the increase in the value of individual parliamentary amendments from 1,2% to 2% of Net Current Revenue (one of the bargaining chips for the approval of the NAF) reinforces the semi-presidential tendencies that have been growing in the country since at least Eduardo Cunha.18

Now, given the situation and considering that this, due to the growth of Bolsonarism itself, is one of the most conservative congresses in history,19 It seems clear that the executive's room for maneuver in negotiating the parameters has become very narrow, especially in defining the primary result targets for the period 2024-2026.20 Despite judging that the target of zero results in 2024 “definitely does not make sense”, the economist Luiz Carlos Bresser-Pereira, former Minister of Finance and Administration, highlighted, however, that the commitment of Fernando Haddad, current Minister of Finance, with this result, served to approve the New Fiscal Framework in Congress.

But the picture of the elements that turn the progress of negotiations around the fiscal regime into a true walk on thin ice would not be complete if we did not mention another important institutional change that resulted from the conservative-liberal uprising that took over the country after the 2016 coup. In addition to adopting the spending cap, the Temer government was responsible for other major counter-reforms, which entailed significant transformations from a social point of view, with enormous losses for workers' rights, such as labor reform and the generalization of outsourcing.

However, from the point of view that concerns us here, that is, the degrees of freedom that the Executive power has to implement a given economic policy, the most profound change came with the subsequent government. In February 2021, Bolsonaro sanctioned Complementary Law 179/21, which granted autonomy to the Central Bank of Brazil (BCB). The main change introduced by the law was the four-year term of office of the president and his directors, which did not coincide with the term of office of the President of the Republic.

Autonomy removes from the jurisdiction of each new elected government one of the most important legs of economic policy, monetary policy, as it will have to live, for two years, with a Central Bank not chosen by it. In the Brazilian case, Lula was the first government official to have to go through this damaging experience, given that, when the law came into force, at the beginning of 2021, it was up to Jair Bolsonaro to appoint the president of the BCB, whose term will end- It will only be in December 2024.

Now, if the necessary fiscal-monetary coordination is already hampered by the mere existence of autonomy granted to the monetary authority, imagine the degree of difficulty that will involve the relationship between, on the one hand, a newly elected center-left government , with substantive social objectives, and, on the other, a BCB appointed by the previous government, marked by ultraliberalism. The conflict that has been established, since the beginning of this third Lula administration, between the economic authorities of the new government and the president of the BCB, who maintained an absurdly high interest rate, despite the increasing improvements in all macroeconomic indicators (prices, external results, exchange rate, etc.), is strong evidence of this immense difficulty.

This substantive change in the country's regulatory-institutional panorama ratifies the current government team's minimum margin of maneuver in negotiating the terms of the new tax regime. It is not difficult to see how this is also related to a sort of rarefaction of democracy in many of the devices celebrated by liberal thought, such as privatizations and spending caps. In all these cases, it is about reducing the space for policy action, either because the market is given the management and production of what previously, in some way, was the responsibility of the State, or because public spending starts to be guided by , and constrained, not by political choices, but by “technical issues”.

In the case of the Central Bank's autonomy, this reduction in the policy's operational capacity seems to be even more true. Reflecting on the intellectual and factual history of the idea of ​​austerity, Mark Blyth, professor at Brown University, recalls, in a 2013 book,21 that it was the “findings” of Milton Friedman’s monetarism and James Buchanan’s public choice theory that gave the indiscriminate cutting of public spending a theoretical status that had been lost since the Keynesian avalanche. But what is most interesting in the reflection is the connection made between the predominance of these ideas since the 1980s/1990s and the defense of an independent monetary authority.22

For him, this set of theories reaches an inescapable result: the only way to save the economy from the destructive forces that derive from the democratic organization itself would be to ban democracy. As this seems somewhat unpopular, the alternative is to make the monetary authority independent, since, according to this idea, these authorities can credibly commit to price stability, something that politicians cannot.

Taking these elements together, there seems to be a certain logic and strategy in the behavior of the economic authorities of the Lula 3 government in conducting the negotiations that managed to approve, be it the design of the New Fiscal Framework or the size of its parameters. The zero target for the primary result in 2024 seems to make some sense, as it was necessary to remove from an ultra-liberal monetary authority, and with total autonomy to command monetary policy, any argument that reinforced the practice of maintaining real interest rates at stratospheric levels. Not by chance, even though there was a deadline of August 31, 2023, to present the proposal for the new tax regime, the Ministry of Finance brought the announcement forward by five months, making the proposal for the New Fiscal Framework public on March 31.

A good indicator of the strong constraints to which the Executive power in Brazil is subjected today is to consider the Inflation Reduction Act (IRA), approved by the US government in August 2022. Aiming to support the energy transition to renewable and clean energy sources, substantial investments are planned, including in the form of tax incentives. To finance them, the American government created a new 15% tax on any company that has annual revenue above US$1 billion for three consecutive years, in addition to a 1% rate on share repurchases. According to President Joe Biden, the IRA restores tax fairness by making large corporations pay their share.23 Well, anything like that if tried here would generate a deafening noise and could end in impeachment.

Because of this, the much-discussed tax reform proposal is being conducted by the current government in a piecemeal manner. On December 20, 2023, Constitutional Amendment 132 was enacted, which deals with part of the tax reform. Despite containing taxes on property – Motor Vehicle Property Tax (IPVA) for jets, yachts and speedboats, and progressive taxation on inheritances –, the main focus of EC 132 is indirect taxes, with the creation of two types of value added tax, which will replace five other taxes. This part of the reform, however, does not affect the tax burden, nor its distribution; It primarily aims to modernize the system, making it more modern and efficient and with lower inspection costs for the State.

The most difficult part, and which will certainly generate enormous pressure in the opposite direction since the interests of large corporations and big capital are entrenched in Congress, is the one to be discussed in this year 2024, which will touch on direct taxes, and through which will seek to make the richest pay their share (for example, by taxing dividends; apart from Brazil, only Estonia and Latvia do not charge such a tax).

Knowing how difficult it will be to carry out this rearrangement in the tax system, the Ministry of Finance has been seeking, for now, to combat the so-called “jabutis”, tricks inserted into the legal framework, especially since 2014,24 that promote unjustified tax privileges, from which the largest companies benefit above all. Data from the National Treasury indicate that the federal revenue/GDP ratio went from an average of 19,7% in the period 2004-2013 to an average of 17,7% in the period 2014-2023. Even disregarding the year 2020, completely atypical due to the pandemic, this last ratio stands at 18%.25 How can we explain this disappearance of almost 2% of GDP in terms of revenue? The “tortoises” are an important part of the response and the Ministry of Finance decided to work there to rescue the State’s spending capacity, while the tax reform is not complete.

Consistent with this effort, several measures have already been taken: (a) changing the rules in the Administrative Council for Tax Appeals (CARF), guaranteeing the casting vote for the tax authorities, in the event of a tie; (b) partial reversal of the income tax exemption on interest on equity; (c) taxation of exclusive funds and offshore; (d) the repayment of the payroll of 17 large sectors; (e) the reinsertion in the calculation base of corporate income tax (IRPJ) and Social Contribution on Net Profit (CSLL) of amounts arising from donation or subsidy revenue made by the public authority;26 (f) the regularization of imports via e-commerce; (g) the taxation of bets (online sports betting); (h) the revocation of the Events Sector Emergency Resumption Program (PERSE), created during the pandemic, but extended by Congress until 2026; (i) the lock placed on the rules for issuing securities exempt from income tax, such as Real Estate Credit Letters (LCI) and Agribusiness Credit Letters (LCA);27 (j) limitation on the value of exclusive pension funds (which are tax exempt).

Some of these measures have already become law, others are still in force as provisional measures and others simply required administrative changes so that they could be implemented. Considering this entire set of initiatives, it is reasonable to think that the zero deficit target can also function as an element of pressure on the Legislature to transform into law the provisional measures that instituted many of these changes.

In a recent book, the current Minister of Finance defends the thesis that, with the Proclamation of the Republic at the end of the 19th century, the Brazilian State, characteristically patrimonial, changed hands without becoming republican.28 The substantial collection of “tortoises” found by the government in the country's regulatory-tax framework, all of which enable tax evasion for those who can pay the most, is clear evidence that this situation, which produces social anomie, has regrettably not changed. If we associate this situation with the current historical moment, with a fourth power represented by the Central Bank, the most conservative Congress in history wanting (and partly succeeding) to govern and fascism lurking, it is easy to see how thin the layer of ice is. which the federal Executive had to navigate in the arduous task of creating a replacement for the sinister spending ceiling that would not be so annoying.

However, as we tried to demonstrate, this was not merely a question of finding a suitable technical expedient to solve a macroeconomic problem of a fiscal nature. There is an entire ideological-political-economic trajectory, built over decades, that today forces the Lula 3 government, like never before, to adopt a fiscalist stance. The material forces (financial wealth, rentierism) that continue to benefit from the impossibility of removing this straitjacket currently have in the binomial “Weakened Executive & Legislative with inflated power”, a strong ally in the sense of perpetuating this situation. Clearly, the limits of this strategy of reconciling a pro-austerity stance with tax justice are not wide.

Only history can tell to what extent it was successful, whether it managed to even begin to reverse the game and, above all, whether it managed to free the country from the return of ultraliberalism embraced by fascist horror.

*Leda Maria Paulani is a senior professor at FEA-USP. Author, among other books, of Modernity and economic discourse (Boitempo). [https://amzn.to/3x7mw3t]

Originally published on the portal phenomenal world


  1. Dilma was initially removed from her position on May 16, 2016 and had her presidential mandate definitively revoked on August 31 of the same year. The accusation was so weak that Dilma lost her position, but she did not lose, even temporarily, her political rights.
  2. PMDB was the acronym of the Brazilian Democratic Movement Party, which in 2018 removed the word “party” from its name and became the Brazilian Democratic Movement (MDB).
  3. See if A Bridge to the Future, Ulysses Guimarães Foundation, 2015, p. two.
  4. The term, very appropriate, comes from Maria da Conceição Tavares, in: Tavares, MC (1997). The Resumption of North American Hegemony. In: Tavares, MC and Fiori, JL (org.) Power and Money: a political economy of globalization. Petrópolis: Voices.[https://amzn.to/4e6zqzk]
  5. In addition to rebuilding the country's reserves, the appropriate technical remedy to overcome inflation with a strongly inertial nature also played a role in the success of the Real Plan: the Real Unit of Value (URV), a virtual currency. See in this regard: Paulani, LM (1997). Inertial Inflation Theory: a unique episode in the history of economic science in Brazil? In: Loureiro, MR (org.) 50 years of Economic Science in Brazil. Petrópolis: Voices.[https://amzn.to/458fWGH]
  6. The policy of high real interest rates benefited rentier capital twice, increasing its income and, at the same time, making the real and financial assets produced here very cheap.
  7. The primary result, as we know, arises from the comparison between revenues and expenses of the public sector in a given period, without considering, among the expenses, the resources destined to pay the service of the public debt. In Brazil, the result of the public sector is composed of three elements: result of the central government (federal government plus Central Bank), result of regional governments (states and municipalities) and result of state-owned companies.
  8. The second term, it is worth mentioning, was prohibited by the Federal Constitution until 1997, when Congress changed the constitutional norm to authorize re-election, in a legislative process openly supported by the then president.
  9. The very appropriate metaphor I use here is from Paulo Arantes, in: Arantes, PE (2003). Kissing the Cross. Report, no. 44.
  10. In addition to maintaining the macroeconomic regime inherited from FHC, additional measures to complete the process of insertion of the Brazilian economy into international circuits of financial appreciation were immediately taken: reform of the bankruptcy law (to increase the security of private sector creditors), extension of pension reform for public servants and deepening of the financial opening process. The only item on the menu that was relatively reined in was the privatization process.
  11. The data comes from the new series of national accounts – 2010 base – released by the Brazilian Institute of Geography and Statistics (IBGE), the institution responsible in Brazil for preparing national accounts and estimating macroeconomic aggregates, such as GDP.
  12. In the context of the crisis between the Executive and Legislative powers that deepened in 2015, the Chamber began to put on the agenda and approve a series of projects that created permanent expenses, making the government's fiscal situation even more difficult. In the media, these initiatives became known as bomb agendas.
  13. The concept here is General Government Gross Debt (DBGG), which covers the federal government (minus the Central Bank), state and municipal governments and state-owned companies. In December 2016, when the spending cap was approved, the ratio was 69,8%. The information, from the Central Bank, is available here.
  14. Accounting maneuvers involving transfers from the National Treasury to federal banks, in order to postpone expenses, artificially producing more favorable fiscal results.
  15. Although more restrictive to approve than an Ordinary Law, the Complementary Law is, however, easier to approve than a Constitutional Amendment. In the case of the Ordinary Law, a simple majority is required (half plus one of those present in the legislative house), while in the case of the Complementary Law (which necessarily deals with matters explicitly mentioned in the Constitution) an absolute majority is required (half plus one of the total number of members of the legislative house). Finally, for the approval of an Amendment to the Constitution, a qualified majority (2/3 of the members of the legislative house) is required.
  16. It is worth noting here that, in recent decades, the greatest pressure for the growth of this relationship comes from the high level of interest paid to public debt holders and not from public spending. But the first type of expense, unlike the second, does not cause any scandal, either among liberal economists or in the mainstream corporate media.
  17. See, for example: Baptista JR, PN (2023).Is there a Conciliation with Faria Lima?; Bastos, PPZ (2023). Four Ceilings and a Funeral. IE Unicamp Situational Center – CECEON, Note 21; Bastos, PPZ; Decache, D.; Alves, JR, AJ (2023). Will the New Fiscal Regime Restrict the Resumption of Development in 2024? IE Unicamp Situational Center – CECEON, Note 22.; Singer, A.; Rugitsky, F. (2023).Lula Government – ​​Year I – Economy.
  18. federal deputy, then in the PMDB, who commanded the Chamber of Deputies from February 1, 2015 to July 16, 2016, when his mandate was revoked.
  19. See, for example, the advertisements for Full News,ConjureR7.
  20. Regarding the issue of the primary result target for 2024, a manifesto from economists even appeared asking for its review, also signed by the author of these lines. Despite understanding the significant constraints that mark the negotiations (and which I try to explain in the text), I thought that signing such a manifesto would help to put political pressure on parliament to acquiesce to the change. President Lula himself, moreover, had already made a request in the same direction. Regarding the manifesto, see here.
  21. Blyth, M. (2013). Austerity: The History of a Dangerous Idea... Oxford: Oxford University Press.
  22. It is worth noting that, as of LC 179/21, the BCB now has administrative autonomy (fixed mandate for president and directors) but not independence stricto sensu, since important parameters such as inflation targets continue to be defined by the National Monetary Council (CMN), constituted by the Ministry of Finance and the Ministry of Planning, in addition to the monetary authority itself. In any case, this is a significant change, since the Executive is no longer able to influence the way in which monetary policy is operationalized. If, for example, you judge that interest rates are at abusive levels, you can do nothing, as you are prevented from replacing the president of the monetary authority.
  23. See about this news and this president's speech.
  24. The year 2014 is key, because it is the first to receive the full impact of the extension of tax exemptions on the payroll (in reality a change in the basis of the collection of the employer's social security contribution from the payroll to the company's revenue; the change is becomes a tax exemption because the tax rate on revenue does not compensate for the withdrawal of contribution from the payroll). The measure had already been introduced in 2011, within the scope of “Brasil Maior”, but covered very few sectors. As a way to face the worsening consequences of the international crisis on the Brazilian economy, the Dilma government sent to Congress, throughout 2012 and 2013, provisional measures that extended the benefit to sectors such as civil construction and retail trade, large employers of labor constructions. But Congress, at the pace of the bomb agendas, expands it to countless other sectors. According to Laura Carvalho, the number of benefiting sectors rose from four, originally, to 56 in 2014. See: Carvalho, L. (2018). brazilian waltz. São Paulo: However, p.70.
  25. The calculations used data on the federal government's total revenue, deducting constitutional and legal transfers to states and municipalities, available here. Data on GDP are from IBGE, collected from the website Ipeadata.
  26. The exclusion of these amounts from the calculation base of these taxes was intended to encourage investments, but a Congressional measure (LC 160/2017) equated funding subsidies with investment subsidies. According to the new legislation (Law 14.789, of 29/12/2023), in the case of subsidies intended for investments, a tax credit will be generated.
  27. Aiming to encourage investments in the agricultural and real estate sectors, these securities, as well as Agricultural Receivables Certificates (CRAs) and Real Estate Receivables Certificates (CRIs) are exempt from income tax. It turns out that the eligible collateral for the issuance of these titles has been expanding, thus distorting their original purpose. In two resolutions issued by the National Monetary Council at the end of February 2024, adjustments are made to prevent the improper issuance of exempt securities.
  28. See: Haddad, F. (2022). The Excluded Third: Contribution to a Dialectical Anthropology. Rio de Janeiro: Zahar, p. 13. [https://amzn.to/4aIGS0P]

the earth is round there is thanks to our readers and supporters.
Help us keep this idea going.

See this link for all articles


  • About artificial ignoranceEugenio Bucci 15/06/2024 By EUGÊNIO BUCCI: Today, ignorance is not an uninhabited house, devoid of ideas, but a building full of disjointed nonsense, a goo of heavy density that occupies every space
  • The society of dead historyclassroom similar to the one in usp history 16/06/2024 By ANTONIO SIMPLICIO DE ALMEIDA NETO: The subject of history was inserted into a generic area called Applied Human and Social Sciences and, finally, disappeared into the curricular drain
  • Franz Kafka, libertarian spiritFranz Kafka, libertarian spirit 13/06/2024 By MICHAEL LÖWY: Notes on the occasion of the centenary of the death of the Czech writer
  • A look at the 2024 federal strikelula haddad 20/06/2024 By IAEL DE SOUZA: A few months into government, Lula's electoral fraud was proven, accompanied by his “faithful henchman”, the Minister of Finance, Fernando Haddad
  • Letter to the presidentSquid 59mk,g 18/06/2024 By FRANCISCO ALVES, JOÃO DOS REIS SILVA JÚNIOR & VALDEMAR SGUISSARDI: “We completely agree with Your Excellency. when he states and reaffirms that 'Education is an investment, not an expense'”
  • PEC-65: independence or patrimonialism in the Central Bank?Campos Neto Trojan Horse 17/06/2024 By PEDRO PAULO ZAHLUTH BASTOS: What Roberto Campos Neto proposes is the constitutional amendment of free lunch for the future elite of the Central Bank
  • Chico Buarque, 80 years oldchico 19/06/2024 By ROGÉRIO RUFINO DE OLIVEIRA: The class struggle, universal, is particularized in the refinement of constructive intention, in the tone of proletarian proparoxytones
  • Why are we on strike?statue 50g 20/06/2024 By SERGIO STOCO: We have reached a situation of shortage of federal educational institutions
  • The melancholic end of Estadãoabandoned cars 17/06/2024 By JULIAN RODRIGUES: Bad news: the almost sesquicentennial daily newspaper in São Paulo (and the best Brazilian newspaper) is rapidly declining
  • The strike at federal Universities and Institutescorridor glazing 01/06/2024 By ROBERTO LEHER: The government disconnects from its effective social base by removing those who fought against Jair Bolsonaro from the political table