Contrary to what the Ministry of Economy says, the amendment to the Constitution resulting from the Emergency PEC, which opened space for new emergency aid, is far from being a “tax reform”, in the evaluation of the executive director of the Independent Tax Institution (IFI), Felipe Salto.
In an interview with EXAME, the economist warns that the benefit to the most vulnerable will come by Provisional Measure, but the adjustments in the public accounts that would compensate for the expenditure have no date to arrive. “The PEC was proposed as a kind of bargain from the Ministry of Economy to exchange a possible fiscal adjustment for aid, but the rules will not generate fiscal adjustment in 2022, in 2023 and, probably, not even in 2024”, points out Salto.
The triggers so defended by the government’s economic team, such as the freezing of public servants’ salaries, will not take effect until 2025, according to the IFI’s calculations. In addition, states and municipalities will not be obliged to adopt cost containment measures, even in times of fiscal urgency, and the provision that provides for a reduction in tax incentives risks not having any effect.
See the main excerpts from the interview:
The government is expected to send the provisional emergency aid measure in the coming days. The PEC approved by Congress, now amended, establishes a limit of 44 billion reais for spending on the benefit outside the ceiling. Was this limit necessary?
The solution found, which was to fix the amount in the Constitution, gives more security to the government, because there were uncertainties about the conditions of unpredictability and urgency required to make the credit. On the other hand, it ties the possibilities a lot, because the value was fixed at 44 billion reais. It is quite unusual to place a nominal number in the Constitution.
Does it mean that if the government needs new aid throughout the year, it will need to have one more PEC?
If a new round of assistance is required, a new amendment may be necessary. And this is not a negligible scenario. The recovery expected in the second half depends a lot on the possibility of state governments being able to make less restrictions on circulation, and this will only happen if the vaccination was done in a relevant percentage of the population, which today is not happening. We have a very discouraging horizon, judging by the pace so far.
In that case, would it be necessary to start the process from scratch to release the aid?
The fact that the aid was created by PEC created a jurisprudence that now, if it is necessary to make a new credit, in the face of a situation that gets worse, that does not improve and that will again require a PEC so that the government does not become exposed to the risk that the credit will be questioned. But it is too early to say. We need to see how this scenario will go first, and then assess whether it will be necessary or not.
Does PEC have any immediate counterpart to compensate for the expenditure with the aid?
There is no counterpart now. The rules that are being created would be the counterpart, but for an adjustment that would happen over time. The PEC was proposed as a kind of bargain by the Ministry of Economy to exchange a possible fiscal adjustment for aid, only that the proposed rules will not generate fiscal adjustment in 2022, 2023 and probably not even in 2024. The rule foreseen for the Union only will allow us to trigger triggers in 2025, according to our accounts.
What are the flaws in the proposal in this regard?
PEC created three channels that could be sources of adjustments. The first is the rule of mandatory spending by the Union: when it exceeds 95% of primary expenditure, it would trigger a set of triggers. According to our accounts, this percentage of 95% would only be reached in 2025. Another channel is tax expenditures. The PEC provides for a reduction in tax incentives, but the only obligation is for the Executive to present the plan, a set of bills to reduce these expenses. If Congress does not approve, there is no sanction foreseen.
What happens if the government does not send the plan?
The government is obliged to rule in up to six months, but sending it to Congress means nothing. You can go on forever there. Congress has no obligation and no deadline to approve the proposal. The PEC does not provide for any sanctions. It is also worth mentioning that the amendment already provides for exceptions right out of the box, and they represent half the volume of tax expenditures.
What is the third adjustment channel?
Adoption of measures by states and municipalities, but the rule is optional. If they reach 95% current expenditure on current revenue, it is up to the governor or mayor to trigger adjustment measures, but it is not automatic. The only sanction that exists is that, if you do not activate it, you will not have the possibility of having the endorsement of the Treasury in loan operations that you may do with multilateral organizations, banks, etc. Opera summary: the three channels being proposed have no guarantee of a short-term adjustment.
All of these points that you mentioned could have been adjusted during the process.
Yes. It is a speculation that needs to be made with the government, because Senator Marcio Bittar’s proposal has already come with the percentage of 95% for the Union. Why not 93%? If it were 93%, the triggers could be triggered already in 2022. Technically, it could be a lower percentage, to be able to trigger soon. The government had that opportunity and did not. As it turned out, next year there will be no additional adjustments. The spending ceiling is still valid, but any spaces that appear on the ceiling will be able to be used to give salary readjustments, for example.
Rumors arose that, with PEC Emergencial, the public service would be frozen for 15 years. Is this fake news?
Yes. There is no such thing at PEC. Salary is not frozen for 15 years. What it does is create the possibility of triggering triggers and, within the triggers, there is a prohibition on granting readjustments. If the ceiling is broken in 2025, it automatically triggers the triggers, in the case of the Union. Only, in 2026, you can change the ceiling rule and, more than that, if you trigger triggers in 2025, personnel expenses will be more controlled and the percentage may drop from 95% over time. Nothing guarantees a fixed deadline in this regard.
In the Chamber, during the process, deputies lifted the ban on career advancement. Does that make a big difference in the possible economy?
Does. To give you an idea, the Union’s spending grows 3% per year, impacted by retirement replacements, by the number of civil servants, but also by progression. Last year, spending grew more or less in this range without an adjustment. When you take that away from the triggers, you take away a great deal of power from the PEC, which would be a possibility to keep personnel expenses more controlled.
Parliamentarians also removed the possibility of untying the Budget, but that idea may still return. Do you think it is feasible?
The only thing that has really changed with the PEC in this regard is the issue of public funds. There is a large amount of money deposited in the single account, which is called a financial surplus. These are linked resources that will now be unlinked and that could not be spent on other purposes. What PEC allows is for the government to use this balance from the single account to be able to write off the public debt. It helps in debt management, but does not open any kind of fiscal space.
So it can’t be considered an adjustment measure either?
It is a tax management measure that is positive, it can generate some relief for the Treasury, if it can take these resources and does not need to issue as many bonds as it would need in their absence. But in the end it does not reduce public debt.
Minister Paulo Guedes has spoken of renewing Pronampe and the Emergency Benefit. Do you think they are important and feasible measures now?
BEm has 8 billion reais left over from last year. If these remains are executed, they remain outside the ceiling. There is budgetary space for re-editing BEm. But you have to see exactly what they are going to do, to be able to assess how it will be financed.
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