Spending ceiling is dead and needs to be replaced, says economist de Moro – 01/11/2022 – Mercado

Economic advisor to presidential candidate Sergio Moro, economist Affonso Celso Pastore, 82, says the spending ceiling is dead. The rule limits the increase in expenditure to inflation.

For him, it is necessary to replace it with a fiscal framework that requires compliance with budget limitations to avoid an escalation of interest rates in the country.

Pastore says in an interview with leaf that the roof worked until it was destroyed and that new rules are needed for public coffers to continue limiting expenses.

“Without a fiscal anchor, the implicit interest rate on debt will quickly return to the situation prior to the approval of the ceiling rule”, he says.

He rejects the idea that the new fiscal rule should also take into account the revenue scenario and emphasizes the need to turn attention to cutting excessive spending and waste. “It is a mistake to solve the problem with the increase in the tax burden”, he says.

For Pastore, it is possible to allocate resources to social policies as long as reforms are made to review expenditures. On the other hand, investments in infrastructure, which critics of the ceiling point out as one of the main ones affected by the expenditure cap, should be led by the private sector.

Asked more than once about the new tax framework he defends, Pastore did not elaborate. On other occasions, he stated that he still did not have the final answer to the question – although he believes that once it is defined and fulfilled, the market will calm down.

Former president of the Central Bank during the military regime, Pastore preferred to give the interview in writing.

This interview is part of a series of leaf on the five-year spending ceiling with interviews with the economic advisors of the main candidates for the Planalto Palace in 2022.

The publication order follows the performance in the last Datafolha search.

Did the spending cap bring more benefits or harm to the country? While there was hope that reforms would bring spending under control, the ceiling brought only benefits. For the country to grow, fiscal responsibility is needed.

Temporarily, the ceiling guaranteed this and the consequence was the reduction of interest both in the real neutral rate and in the implicit interest rate on gross debt.

Critics claim that the drop in interest rates stems precisely from the lower growth perspective based on public spending. like mr. evaluate this view? There is no logic in this criticism. when the government [de Dilma] Rousseff decided to spend to grow, threw the country into the recession that started in 2014.

This is the longest economic cycle in our history. Eight years after the start of the 2014 recession, GDP is still 3.5% below the level reached in 2013.

Without a fiscal anchor, higher spending raises the primary deficit, depreciates the exchange rate and increases inflation, forcing the Central Bank to raise interest rates, which reduces growth and worsens debt dynamics.

Without the ceiling, would interest rates rise again? The spending ceiling is estimated to have brought the real neutral interest rate to 3% per annum, and we know that the implied debt rate has dropped from 14% in 2016 to 7% today.

The fiscal risk premium has already been raising the neutral interest rate, and the destruction of the spending ceiling has depreciated the exchange rate and raised inflation. As a result, all nominal interest rates, from one to ten years, are around 12% per year.

In 2022, the government will have to roll over just over 30% of debt, replacing bonds that pay on average 7% a year with bonds that pay 12% a year.

Even though [o governo] did not generate a primary deficit, which is impossible, in one year the interest rate on the debt will rise slightly above 1.5 percentage points, and in two years by more than 3 points.

Without a fiscal anchor, the implicit interest rate on debt will quickly return to the situation before the ceiling rule was passed.

Congressional attempts to appropriate the Budget, such as through amendments, were limited by the ceiling. Is this a benefit? Parliamentary amendments open a gap for patronage and political bargaining. By increasing spending, they favor parties and congressmen without the benefit of society as a whole.

The Budget proposal requires a social cost/benefit analysis of expenditures, which must be carried out by the Executive Branch. Congress is responsible for approving the Budget and overseeing its execution.

Public investments dropped to historic lows after the cap. For a country that still suffers from poor infrastructure to a large extent, does it make sense to limit investments? Infrastructure investments have high social returns and promote growth. However, with greater efficiency than if they were carried out by the government, they can, with rare exceptions, be carried out by the private sector in the form of concessions.

This requires good regulation, open, competitive and well-designed auctions.

As they are investments made with debt, they need loans intermediated by the capital market with low interest rates, which are the consequence of a good fiscal anchor. The expenditure ceiling in no way prevents these investments from being carried out.

Within a budget of BRL 1.8 trillion, is there room to redirect resources to policies of interest to the country? If so, what expenses could be cut? Brazil has a very high level of absolute poverty, which requires the government to build a social protection network. But this can be done very efficiently within the cost cap.

An example is a work carried out by Vinicius Botelho, Fernando Veloso and Marcos Mendes, which became the project [de Lei] of Social Responsibility which is in the hands of Senator Tasso Jereissati [PSDB-CE].

The ceiling can continue to exist with a reduction in absolute poverty and an improvement in income distribution, within the spending ceiling. Cuts should be made where there is waste.

Mr. Do you advocate keeping the ceiling rule unchanged or do you propose some kind of adjustment? If there is a need for a change, what would it be? The ceiling rule is unfortunately dead. It worked as long as it wasn’t destroyed. It will have to be replaced by a fiscal framework that controls spending.

And what should the new model be, in your view? The important thing to convey is that there is overspending and waste. This was the case with Social Security, which was partially corrected, and there are others.

It is not a problem that can be solved by raising the burden of current taxes or creating new ones, which prevents the resumption of growth.

Reforms are needed that control spending and direct existing resources to programs that have the greatest returns for society as a whole, not interest groups and corporations.

The cap applies a restraint on the expenditure side, while relieving the country from re-discussing the revenue side (such as changes in the tax system). So, wouldn’t a rule that also consider the revenue side be more suitable? We already had fiscal responsibility when the macroeconomic policy tripod model was valid. There were primary surplus targets that led to debt/GDP reduction.

However, primary spending grew by 6% a year, the surplus targets could only be met with the increase in the tax burden, which grew a lot and became an inhibitor of economic growth.

It was necessary to control spending, which requires reforms. It is a mistake to solve the problem by increasing the tax burden.

How to put the country on the path of economic growth and what are the first measures to be adopted by the new government? There is no silver bullet. The resumption of growth requires a broad reform program that includes, among others, the taxation of goods and services and the Income Tax.

However, it will not succeed without rebuilding a fiscal framework that requires compliance with the budget constraint and that creates the conditions for monetary policy to control inflation. This is the necessary condition for the resumption of growth.

Affonso Celso Pastore, 82

Former president of the Central Bank during the Figueiredo government, last president of the military regime. Before that, he was part of the Ministry of Finance team during Delfim Netto’s administration, also during the regime. Graduated in economics from USP (University of São Paulo) and PhD in economics from the same institution. It is associated with the CDPP (Center for Public Debates and Policies)

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