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On Wednesday (29/03), Finance Minister Fernando Haddad presented the final version of the new fiscal rule to President Luiz Inácio Lula da Silva (PT) and Congress leaders. The project will replace the expenditure limit and has been the focus of the country’s economic discussion. It foresees that the growth of federal expenditures will be limited to 70% of the increase in revenues projected for the same year. The project is expected to be analyzed in Congress this week.
How Will It Work?
The government intends to work with a new restriction on expenses, which would grow associated to the revenue, but at a slower pace. When projecting revenue growth for the following year, the government will also find the expenditure advance limit. For instance, with an estimated increase in revenue of 2% and the percentage increase in spending on it of 70%, the increase in expenditure could be up to 1.4%.
To prevent expenses from being affected by extreme drops or rises while following revenues in atypical years, the idea is to predict that expenditures have limits against heights and drops. The new fiscal framework must have adjustment mechanisms linked to the country’s primary result. If it is considered bad in relation to a certain level, triggers are activated to stop changes in expenses.
Reactions: Stock Market, Businessmen and Economists
The Stock Exchange closed at an increase of almost 2% and the dollar went below R$ 5.10, while market agents analyzed the new fiscal rule presented by Minister Haddad. Among these professionals, media sources verified that there was the impression that the rule generates a predictability of the trajectory of the public debt and sends a signal that the government works with a limit on expenditures, despite the focus being on rising revenues.
Meanwhile, some economists praised the rule, but a skeptical view prevails due to the significant increase in revenue predicted by the economic team. Among businessmen, the reactions were also positive.
Proposal to Raise Revenues
On Thursday (30/03), Haddad announced thathe will present a package to raise revenues between R$ 100 billion and R$ 150 billion per year. He said that the idea is to review tax benefits and start charging taxes from sectors that currently do not pay. Further details were not provided.
Projected Results
The government forecasts that the deficit, projected at 1% of GDP this year, will reach zero in 2024. In 2025, the estimate indicates a primary surplus equivalent to 0.5% of GDP. For 2026, the positive balance would be 1% of GDP.
Our Analysis:
Since 1985, when the democratic regime returned to Brazil, the skillful management of the economy has been a quite important factor for the stability of all elected presidents. However, when the economy goes bad, social instability tends to increase, with consequent waves of protests and strikes. Such events can become drastic and even fatal for an administration when associated with lack of political support in Congress. There were two episodes when this occurred, during the Fernando Collor de Mello’s presidency, in 1992, and during Dilma Rousseff’s second term, in 2016. The result was the impeachment of both leaders. Lula’s third mandate is different from his first two terms, when he obtained major victories in the polls. He won the past election by a very thin margin and fought a very motivated political opposition. In addition, he has not yet managed to solidify his alliances in Congress, making him fragile to any big mistake in the economic sector.
