Understand why the government wants to declare a state of emergency and what the consequences are

BRASÍLIA – The government’s strategy of declaring a state of emergency to approve a broad package of social benefits on the eve of the election is seen as fragile and questionable by experts heard by the Estadão – both from a legal and fiscal point of view. The so-called “desperation package” is already valued at R$ 38.7 billion outside the spending ceiling – and could cause government spending to grow again as a proportion of the GDPwhich had not happened since the beginning of the spending cap rule.

According to economist Marcos Mendes, an associate researcher at Insper and one of the fathers of the ceiling rule, the package, which includes measures such as Brazil aid to BRL 600, the zeroing of the queue and the creation of a BRL 1,000 truck driver grant would mean an additional expense of 0.4% of GDP in 2022.

As a result, government primary expenditure (not counting interest payments) would rise to 19% of GDP – reversing the downward trajectory introduced by the ceiling. “It is a very high and open fiscal cost, as it has been increasing and sets a dangerous precedent in constitutional terms”, says Mendes.

The spending cap, which took effect in 2017, limits government spending to the previous year’s inflation. With the law, primary spending, which was close to 20% of GDP in 2016, fell to 19.3%. It rose again due to the pandemic and hit the peak of 26.1% in 2020. After the calamity, for this year, the projection was that it would reach 18.2% of GDP. With the new package on the table and considering government precatories in installments – federal judicial debts –, spending should return to the level of 19%.

“The calamity would make room for much more spending, as in the pandemic. The concept of a state of emergency, on the other hand, is more related to disasters, such as climatic ones. It is a question of a mischaracterization of the legislation, to finance the package on the eve of the election”, he says.

Mendes assesses as positive the fact that the government decided to direct the amount initially reserved by the Fuels PEC directly to Auxílio Brasil, instead of compensating for the loss of revenue from States that ICMS of diesel and gas.

“Poverty can be solved with income transfers, but that’s where the problems start, because Auxílio Brasil was poorly designed”, he says. “The minimum amount of R$ 400 stimulated the division of families to accumulate benefits. With R$ 600, there will be more stimulus for this division, and an additional increase in the queue – the same one that the government wants to eliminate. The program is losing focus.”

fuel surge

Constitutionalist Nina Pencak, from Mannrich e Vasconcelos Advogados, agrees with the assessment that the current scenario is not exceptional for a state of emergency decree.

The government’s justification is the skyrocketing price of fuelsbecause of the war between Russia and Ukraine. However, despite being high, the price of a barrel of oil in the international market today is not at its peak. In March, it was close to US$ 140 – today, it is below US$ 120.

“A state of emergency, by law, is about a disaster, not an economic crisis situation. If any crisis that generates price increases becomes a state of emergency, we will live in a state of emergency”, she says. “Make an exception to the Fiscal Responsibility Lawgiven that there are provisions in the Constitution that prohibit these expenses, provisions of the electoral legislation, it is the constitutionalization of fiscal irresponsibility”, he says.

The senior economist at the consultancy Tendências, Juliana Damasceno, warns that the state of emergency decree sets precedents and may just be the gateway to a series of other expenses.

“What this PEC is doing is opening a maneuver in the Fiscal Responsibility Law and in the electoral law. Opening this extraordinary credit, what support does the government have for not granting readjustments to servers, for example?”, he asks. “The hasty and electoral way that has been the north of economic policy decisions has left a very expensive bill. The electoral issue will determine the direction of the budget in 2022 and leaves concerns for 2023.”

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