tax framework could be worse

If simplicity is the highest stage of sophistication, the gadget that shapes the new fiscal framework can be seen as a rudimentary piece. The proposed rules refer to a labyrinth so complex that they suggest something purposeful.

The minister’s balancing act Fernando Haddad was to satisfy (or equally displease) two antagonistic poles. On the one hand, the hard core of PT, to which President Lula da Silva seems to have adhered, for whom considering controlling public spending represents an attack on human dignity. They believe that public spending generates growth and raises tax collections, closing the circle of self-financing just beyond that.

This madness is opposed by the primitive fundamentalism of a good part of market analysts, who have embarked on the fallacy of the spending ceiling and for whom only a very cruel cut in expenses equates the growth of the debt. They ignore that the political conditions for an administrative reform are not in place and that the ceiling law, otherwise impracticable, only scrapped public services. Therefore, if the intention was to shuffle the cards and confuse, the new milestone already fulfills its role.

Keeping expenses growing below the pace of revenue growth can have a stronger impact than you might think. Let’s look back: 12-month changes in total central government expenditure between January 2000 and March 2023 (279 observations) register an average of 12.2% per year, above the average annual change in revenues managed by the Internal Revenue Service, of the order of 11.5%.

If expenses had grown at a rate of 70% of the increase in taxes, as is now being proposed, we would now have a much more favorable picture for the public debt. It is also positive that real expenditure growth is limited to a maximum of 2.5% per year, well below the 5.4% real growth registered in this period.

The debt/GDP ratio, in turn, may have a digestible trajectory if the government is able to generate primary surpluses and, after the generous approval of the Central Bank, interest rates are lower. In this period from January 2000 to March 2023, average annual nominal GDP growth (using the Central Bank’s monthly estimate as a reference) was 10.2%, well above the 70% growth in revenue, around 8% per year. The numbers are many and the simulations infinite, which disallows fatalistic predictions.

The new rule is not good, but it could be worse. Its complexity anesthetized the PT’s virulence and even the market did not convulse. It’s what we have. Point for the minister.