Government studies new fiscal anchor inspired by inflation targets

BRASILIA – O Ministry of Economy is designing a target model for public debt with an up or down fluctuation band, inspired by the inflation adopted 23 years ago by the Central Bank (BC) to define the interest rate policy.

One of the proposals tested is a target for debt between 60% and 70% of the Gross Domestic Product (GDP)with a margin of tolerance of more or less five percentage points, according to the Estadão. For example, if the target is 65% of GDP, the government would meet the target if it took debt to the range between 60% and 70%. Today, the debt is at 78.2% of GDP – at the best moment, in December 2011, it reached 51.3%.

Paulo Guedes, Economy Minister of Jair Bolsonaro;  expectation of the economic area is that the draft regulation will be discussed by Congress in the voting window after the elections
Paulo Guedes, Economy Minister of Jair Bolsonaro; expectation of the economic area is that the draft regulation will be discussed by Congress in the voting window after the elections Photograph: Adriano Machado/Reuters

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There is, however, no closed number. Depending on the level of debt and its trajectory, the band system would make it possible to increase expenses above inflation, as long as the continued decline in indebtedness is guaranteed. If the debt is rising, the government would have to go back to correcting expenditures.

The technicians of the economic team intend to present the results of the simulations in a meeting at the beginning of next week. The model is part of the constitutional amendment regulation enacted in March 2021 that guaranteed the extension of emergency aid.

The amendment introduces a target for public debt in the framework of fiscal rules, but, after more than a year, it has not yet been regulated. The expectation of the economic area is that the draft regulation will be discussed by Congress in the voting window after the elections. The technicians’ idea is that the public debt becomes the main anchor of Brazilian fiscal policy. Today, that role belongs to spending ceiling, a rule that ties spending growth to inflation.

The proportion of 60% of GDP is usually a reference for emerging economies, such as Brazil. The government’s forecast is that gross debt in 2022 will be around 78% of GDP. In 2020, the first year of the covid-19 pandemic, gross debt rose to 88.6% of GDP. At the time, analysts even predicted that public debt could reach 100%, which did not happen.

as showed the Estadão in mid-July, the team of the Minister of Economy, Paulo Guedes, discusses changes in the ceiling with the possibility of guaranteeing a real increase in primary expenditures (above inflation). One of the numbers under study was 1.5% of GDP. This number can go up depending on GDP.

The “rule of thumb” to be applied is that the adjustment of the ceiling to accommodate more social benefits and investments cannot be greater than the expansion of GDP. For 2022, the government forecasts a 2% increase in GDP. For 2023, the estimate reaches 2.5%, a scenario that clashes with the financial market, which projects a slowdown to 0.4%.

Debt target regulation is discussed with the ceiling adjustment. The technicians of the Ministry of Economy in the fiscal area defend the permanence of a rule of control of expenses allied to the target for the debt.

A member of the economic team told the Estadão the advantage is that the amendment itself says that the complementary law can authorize the application of the same triggers (measures to cut expenses) already foreseen, such as freezing the salaries of civil servants and cutting tax benefits. These triggers can be triggered to bring the debt to the target.

In a first-stage scenario of indebtedness and a hole in growing public accounts (the worst-case scenario), the government would have to cut spending, and triggers could be used as a fine-tuning variable over time.

In a second stage scenario, of falling debt and small deficit or surplus, the bands could allow using a “piece” of GDP growth to increase expenditures. Revenue would be growing faster than expenditure over time, and debt would continue on the path of convergence to the target.

In a third scenario, with a nominal surplus (which includes the payment of interest on the debt) and a downward trajectory of the debt, the government could reduce taxes more quickly.

Senate analyst and specialist in public accounts, Leonardo Ribeiro considers it a positive strategy, in line with good international practices, to replace the spending ceiling, an expenditure rule, with a fiscal anchor based on the public debt. “There are transactions that do not necessarily go through the Budget and affect the public debt, such as the capitalization of public banks with debt securities and even the postponement of payment of precatory (Union judicial debts)”, he says. “The spending ceiling has several exceptions, it is easier to circumvent. A debt rule, on the other hand, is more comprehensive and more directly linked to debt sustainability.” He questions, however, stipulating a fluctuation band.

The chief economist at XP Investimentos, Caio Megale, believes that maintaining the current ceiling would be more prudent, with some adjustments to accommodate already announced permanent expenses, such as maintaining the Brazil aid at R$ 600. “As we are still at a very high level of indebtedness, you can’t just bet on increased revenues; it needs to have an expense control that is close to inflation, which ends up being an instrument to reach the debt goal”, he says.

– 51.3% of GDP was gross government debt in December 2011

– 88.6% was the percentage in December 2020, the highest since December 2011

– 80.3% went to how much the weight of debt over GDP fell in December 2021

– 78.2% was the percentage for May 2022, which confirmed a downward trajectory since December 2020

About Yadunandan Singh

Born in 1992, Yadunandan approaches the world of video games thanks to two sacred monsters like Diablo and above all Sonic, strictly in the Sega Saturn version. Ranging between consoles and PCs, he is particularly fond of platform titles and RPGs, not disdaining all other genres and moving in the constant search for the perfect balance between narration and interactivity.

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