The “Fiscal Responsibility” Debate

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By CARLOS PINKUSFELD BASTOS*

Our media and “marketplace” should ask themselves why crime, or irresponsibility, has historically paid off.

The buzzword seems to be “fiscal responsibility” and, like every phrase that acquires great relevance in public debate, it suffers from a fundamental cacophony: after all, politicians and media are talking about the same thing? Do they even know exactly what they're talking about?

We will try to show briefly in this article that the answer to these questions is negative!

Initially, it is important to highlight that this is an expression that escaped the strict technical universe of economics, gained a generic meaning and even invested in moral content.

Irresponsibility is usually seen as a negative behavior, even more so when the object of responsibility is “what belongs to everyone”, public finance. Therefore, any good ruler must be “responsible” in fiscal terms. But in democratic republican regimes, like ours, governments are elected not only to manage public affairs, but to promote the common good. At this point, the debate begins to move away from the “technical” discussion and into the political and even moral field.

There would be a clash of “moralities”. That of the “market” (sic) that would place fiscal responsibility above social responsibility (or else as a supposed condition for any economic improvement) and a supposed opposite position, espoused by those who would prioritize the confrontation of the very serious social ills, placing such background fiscal responsibility. Justice be done, president-elect Lula never defended this position, always resorting to the argument that he was always “fiscally responsible”.

Leaving aside the moral aspects related to the controversial fiscal responsibility x social responsibility, we propose here to return to a previous question, properly definitional, and which underlies the arguments of the elected president and his critics of the “market” and the media: what can this expression or should it mean?

At this point there is no escaping certain technicalities. The government, in its macroeconomic policy, determines an expenditure path, which incorporates direct spending on consumption and investment, and transfers. Transfers, as the name implies, are monetary amounts credited to private agents, the most relevant being social security.

On the other hand, the government also defines, in agreement with parliament, the tax burden and contribution revenues (to social security) as well as tax exemptions, such as, for example, that provided by the application of the Rouanet Law.

The government controls these variables, but not the so-called fiscal outcomes. Among these results, the most famous is the public deficit, either in the “primary” or in the aggregate. The primary is the difference between all expenses, excluding interest paid on debt, and all income. Why doesn't the government control this variable? Because the product fluctuates with the so-called economic cycle and changes in variables, such as the conditions of the world economy, possible cost and/or technological shocks or even financial issues, which are beyond the control of the central bank, affect the value of the product. As the total revenue is the result of the tax burden and the size of the product on which it is levied, the variation of such product will change the total revenue and thus the deficit indicator.

The aggregate deficit adds to the primary deficit the payment of interest on the public debt. In this case, one more variable is also added, the control of which is not a direct decision of the government: the interest rate on the public debt. Without going into too much detail about a complex debate, the interest rate paid by the government on its debt is directly related to the basic rate determined by the Central Bank, in the Brazilian case the SELIC rate. However, this same rate can also be affected by a series of exogenous factors, or shocks, that is, elements that are not under the control of the public administration.

The existence of a deficit obviously implies the growth of government liabilities, of its debt (whether remunerated or not, as is the case with the currency). Here we come to another candidate for a fiscal result indicator: the trajectory of the public debt.

Just to summarize: so far we have four indicator candidates for “fiscal responsibility”. The evolution of public spending, primary deficit, aggregate deficit and public debt.

But, as if we didn't already have so many candidates, this number increases if we remember that the discussion often takes place in terms of the fraction of these indicators over the gross domestic product (GDP). Economists normally measure these indicators against GDP to get an idea of ​​the size of these results in relation to the value of final goods annually produced in an economy. Thus, if GDP changes and, for example, increases, there may be an aggregate deficit, which implies debt growth and, even so, stability, or even retraction, in the usual indicator of public debt in relation to GDP.

Apologizing in advance to readers who flee the famous division of the bill at the bar with the just excuse "I'm human", we think that the table below can help organize the alternatives presented above.

Let's assume an economy that has a GDP in year t worth 100 monetary units and that both this GDP and spending grow by 5% in a time interval of one year. Let us also assume that the tax burden is 20% of GDP, that the initial stock of debt this year is 50 monetary units and, for simplicity, we ignore the payment of interest on total spending.

If the reader went through the table and reached this point, he would have noticed that public spending grew by 5% in absolute terms, but as a fraction of GDP it did not change, as it also grew by the same amount. The deficit in monetary units grew by 5%, but as a proportion of GDP, as is usually presented in economic discussions, it remained stable. And debt rose in terms of currency units but fell as a proportion of GDP, as it is usually treated in the discussion of economic policy.

We can ask, then, given these indicators: is this government responsible or irresponsible in fiscal terms? The answer is: it depends on the indicator.

Assume that he “runs the money machine to finance the 5% increase in social spending”. If the indicator chosen is spending on GDP or, more importantly, deficit on GDP, it can be called responsible, after all this variable has not increased. If the chosen indicator is debt over GDP, it is super responsible, as it decreases the value of this variable.

And then there is the question: when a government is criticized or praised in relation to its declarations of purpose, as, for example, in the debate that took place after the election, what is the argument for doing so? What indicator is the critic or the apologist using? As we saw above, a substantial increase in expenditure and maintenance or even “improvement”, such as a reduction in the debt/GDP ratio, are perfectly compatible.

Even though in the public debate certain technicalities, such as those presented above, are not so easy to discuss, or precisely for this reason, it would not be more responsible or prudent to place the issue in a less polarized or “dramatic” perspective, as the public usually does. media and the “market”?

Here are some examples to illustrate this debate. Why does Lula say he was fiscally responsible? Let's look at its result against the second FHC government, since its first term presented fiscal results that were almost always in deficit, whatever the indicator chosen as a ruler.

In FHC's second term, the government had an average primary surplus of 2,1% of GDP and an average real growth in spending of 4,1%. Therefore, by the criterion of spending, for defenders of the spending ceiling established in the Temer government, FHC was quite irresponsible. But, on the other hand, it maintained a primary surplus throughout the period, which can be interpreted as a “statement of responsibility”.

Lula's attestation of responsibility is even stronger if we think in terms of the primary result. The average primary surplus in his first term, 2,43%, was higher than that achieved by FHC's second administration. Even in his second term, when he faced the serious international crisis of subprime 2008, the Lula Government managed to produce a slightly higher primary surplus, 1,95% on average. In terms of spending, however, it was less “responsible”, because spending grew at rates of 4,9 and 5,6% respectively, both higher than the FHC 2 government. what mattered as a seal of responsibility was the primary result, its average performance was better than that of the previous government.

Interestingly, this is reversed in Dilma Rousseff's first term. The president spent the least, that is, she was the one that least increased public spending compared to Lula and FHC. In other words, she was more responsible, but presented a falling primary result that, in her last year of the first term government, 2014, turned into a deficit.

In terms of debt, the result is more complex because the debt indicator itself is not consensual. But just for the sake of illustration, we will use the concept of net debt, which is a series whose information covers a longer period of time. In this concept, assets such as international reserves, in addition to other government assets, are subtracted from government liabilities.

Using this indicator, the FHC II government performs poorly, as debt expanded from 42,6% to 60,4% of GDP. In the Lula governments, however, he inherited this last figure from FHC and reduced it to 38,2% in 2010. In other words, Lula expanded his spending on average more than FHC, that is, he was more of a “spender”, but delivered an indicator of debt almost 30 percentage points lower than its predecessor.

In short, the “irresponsible” label wielded by the media and the market only revolves around one indicator, the real growth of public spending, a choice that derives from a draconian rule, the spending ceiling, which does not exist in any country in the world. and whose objective has not been respected by any Brazilian government in the last 30 years. To be more dramatic, without sacrificing the truth: there is no record of any government in all of history that has adopted such a practice.

All other indicators, much more usual and relevant for the analysis of fiscal policy, were surprisingly abandoned, or are relegated to a certain oblivion in the recent debate. These indicators, it is worth repeating, are more complex because their estimation depends on a series of factors beyond the control of the government itself.

By this strange yardstick, the world's recent economic history is one of total fiscal irresponsibility. After the Second World War, countries, especially European ones, enriched and simultaneously grew the size of their states, in the construction of their welfare states. But if the countries have grown a lot and the State's participation in the economy has also grown, after all the spending/GDP fraction has risen a lot, then real public spending has grown even more year after year! Our media and “market” should ask themselves why crime, or irresponsibility, has historically paid off.

The truth is that, despite being a historical aberration, the ceiling fulfilled its “mission” of reducing the size of the state, mainly in areas such as education, culture, sports, infrastructure, family farming, science and technology, among others. Expenditures in these areas of public administration have been substantially reduced in real terms from their pre-ceiling peak. But this was a perverse mission, with extremely harmful consequences for the central objective of the government, the promotion of the common good.

We should have increased spending, since the population has increased over the last five years, and Brazil's shortages in these areas are gigantic. Even if it is only to restore historical values, we need to increase public spending. Not to do so would be extremely irresponsible. How irresponsible it is to reduce the fiscal debate to jargon devoid of much content and not discuss medium-term issues, which include the country's macroeconomic conditions, its huge shortcomings and hypotheses about general conditions, especially the external situation.

A broad discussion would be fundamental for the government itself to be able to make a multi-year fiscal program and, if necessary, revise such policies as current results demonstrate the need to do so.

*Carlos Pinkusfeld Bastos is a professor at the Institute of Economics at UFRJ and CEO of the Celso Furtado International Center.

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