What is the spending ceiling that the government plans to break?

Last week, breaking the spending cap has become the federal government’s main strategy to launch Brazil Aid, the social program that will replace Bolsa Família. The rule specifies that the maximum expenditure that the government can incur is equal to the previous year’s budget, adjusted only for inflation.

Included in the constitution in December 2016, during the government of Michel Temer (MDB), the cap has been in effect since 2017 and is expected to last 20 years.

Last week, the government sponsored the approval of PEC (Proposal to Amend the Constitution) from Precatório In the Chamber’s Special Committee, with changes allowing the government to “break through the roof” in 2022 to pay for Auxílio Brasil.

What does the Presidential Election Commission say?

The proposal approved by the special committee – which still needs to be presented in plenary sessions of the House of Representatives and the Senate – anticipates that the government could spend an additional R$83 billion in 2022.

Part of these resources will finance Auxílio Brasil, the social program that will cost R$400. The subsidy will be paid to 17 million households by the end of next year, when Bolsonaro seeks re-election.

The Economy Ministry calculates that about R$34 billion in additional resources will be outside the spending cap, with R$30 billion earmarked for assistance. In practice, this means that the government will spend more than what is required by current law, which puts more pressure on inflation.

Arm wrestling within the government

Minister of Economy Paulo Geddes, was participating in an arm wrestling match within the government. On the one hand, he tried to maintain the ceiling in every way, defending the importance of the mechanism of stabilization of public accounts.

On the other hand, ministers such as Joao Roma, of the Citizenship Division and Rogério Marinho, of Regional Development, have argued that the government needs to increase spending to pull the country out of the crisis. There was also pressure on the government to pay R$400 a month in aid, not R$300 – an amount that fits into the 2022 budget without breaking the ceiling.

Focusing on the re-election of the president Jair Bolsonaro He struck the hammer for an interest of R$400, resulting in changes to be included, in PEC dos Precatórios, which would break the roof. Loser, Guedes has been trying for the past few days face criticism Exceeding the limit is justified.

He admitted this week that the government is breaking the roof, Although he “hates” doing it. nobody (24), Guedes attacked economists who criticized his administration for not respecting the spending cap.

Economists outside government warn that Breaking the roof can be disastrous for inflationAs well as sending a negative message to international investors.

What do those who defend the roof say?

Spending caps have been lauded by those who believe in controlling public spending as a way to attract private investment, keep interest rates low and control inflation. For its proponents, a spending cap is necessary to balance public accounts and maintain investor confidence in the state’s commitment to fiscal responsibility.

If the rule is broken, they say, the base interest rate (Selic), currently at 6.25% per annum, could rise even more, because the risks of investing in Brazil would be greater. In addition, inflation can become more stressful.

What does someone who criticizes the ceiling say?

On the other hand, the ceiling is criticized not only by ministers of the political wing of the government, such as Marinho and Rome, but by economists who call for more public investment to restore the economy and ensure a minimum income for the most needy.

They claim that the current rule prevents public investment, exacerbates the recession and affects mainly the poorest, by reducing resources in areas such as education and health. Since the budget pie is always the same size and some segments necessarily grow each year, such as spending on Social Security, there is a smaller and smaller portion for other expenditures, including health and education.

In the context of the pandemic, in which unemployment has risen and businesses have collapsed, critics also say it is necessary to spend to carry out public works and create jobs to get the country out of the pit faster, in addition to helping the poor.

They also criticize the ceiling for limiting public spending even when the economy is doing well, with gross domestic product (GDP) growing and tax collection increasing. The increase in revenue cannot be used to increase spending.

How is the spending cap calculated each year?

The basis of the calculation is the state expenditures in the previous year, excluding:

• paying interest on public debt;
• mandatory transfers to states, municipalities and the Federal District;
• spending on elections;
• pumping money into state-owned enterprises;
• Transfers to Fundeb (Basic Education Maintenance and Development Fund).

This value is then corrected for inflation. The indicator used is the 12-month cumulative IPCA (Extended Consumer Price Index), which expired in June.

One of the changes made by the KPU is that the calculation will be made based on the January-December period, which will allow syncing with the expense readjustment, which occurs every full year. This synchronization will already save a little space for more expenses, including those with Auxílio Brasil.

For 2021, the spending ceiling is R$1.486 trillion.

What should fit this limit?

Both mandatory and optional (called discretionary) expenses. Mandatory items account for more than 90% and have their intended destination in the legislation, such as social security, social assistance, education and civil servant salaries, for example. Discretionary expenditures are those that can be chosen by the government and mainly represent public investments, such as infrastructure works.

Who is the spending cap worth?

The spending limit applies to the federal administration – it does not apply to municipalities, states and the federal district. There is also a spending limit set for the following federal agencies: Executive Branch Senate House of Representatives Federal Public Ministry Federal Court of Accounts Attorney General of the Federation.

How long will the restriction last?

According to the Constitutional Amendment to the Expenditure Cap (EC 15/2016), the public spending restriction is valid for 20 years, i.e. until 2036.