Newton’s third law, known as the law of action and reaction, states that for every action force that is applied to one body, there is a reaction force on a different body. This works in physics, but also in human relationships. Keeping the Selic rate at 13.75% has been the thorn in the side of the Lula government. But for it to change, the government must also take some action to urge the Central Bank to react. The argument of Roberto Campos Neto, president of the BC, is that solid support for fiscal commitment is lacking. The market, in turn, speaks of a drop of 3 percentage points later this year if the new anchor is put into effect.
But as patience is one of the most valued human virtues, Campos Neto will need to prove his own in the coming days and, from the top of the monetary authority he represents, he will have to seek the necessary balance to remain calm and withstand the pressure that will come to lower interest rates. . At the other end, the Minister of Finance, Fernando Haddad, now supported by the Minister of Planning, Simone Tebet, will try to convince the market that the new fiscal framework will be sufficient to guarantee the stability of the public debt in the future, without causing inflation. .
Haddad has already placed his bets and said he had designed the ideal fiscal anchor to meet President Lula’s investment demands and still permanently pursue the fiscal surplus. With the current debt (BRL 5.7 trillion) 3 points represent a reduction of BRL 173 billion per year in debt interest.
The alternative to the spending cap was one of Lula’s first demands for the economic team and, according to Haddad himself, the efforts began in the transitional government. Now, with the project designed, the minister says that he still needs to hit some numbers with other members of the economic team. The expectation of advisers close to the minister is that the final text will be presented before the next Copom meeting, on the 21st and 22nd of this month.
And with this deadline, Haddad needs to prepare the ground because he knows he will need the support of the National Congress in the journey. “It will involve a complementary law to be approved by the National Congress. At the moment we have the design closed, we are going to present it to the economic area, take it to President Lula and forward it to Congress”, said the minister. The complementary law regulates specific matters when expressly determined in the Constitution. Unlike ordinary laws, which require a simple majority for their approval, complementary laws require the approval of two thirds of deputies and senators — the only difference in relation to a Proposal for Amendment to the Constitution (PEC) is that voting takes place in one shift in two Houses instead of two turns. Inside the Chamber, President Arthur Lira has been sending signals to the Planalto Palace. On Wednesday (8) he assured that Lula still does not have the base he thinks he has in the Legislature. And about the framework, he said that the topic will only advance if it is, in his words, “prudent and responsible”. This message comes after Lula said that the new fiscal anchor would be designed in the Executive, going against the interest of the Chamber and the Senate to share his paternity.
MARKET VISION The expectation of economic agents is that an ideal anchor would be able to reduce the Selic by those 3 points. Specialists in public accounts usually remember that before the approval of the Transition PEC, at the end of 2022, which ended the spending ceiling, projections showed the Selic rate at around 10% at the end of 2023. “This difference of about 3 percentage points is the premium for the fiscal risk”, said XP economist Tiago Sbardelotto, who was also a Finance and Control analyst at the National Treasury Secretariat between 2014 and 2021. Sbardelotto assesses that the framework proposal being discussed, in a correction of expenditure based on GDP per capita, produces a medium-term fiscal adjustment. “We don’t see debt stabilizing over the next ten years. It should only stabilize in the middle of the next decade,” he said. The economist argues that the idea is based on the principle of annual growth of 1% to 1.5% of GDP. “Only a good tax reform would guarantee this potential GDP. But an increase in the minimum wage above inflation and the readjustment of civil servants, as already indicated, do not fit this rule.”
From the international experiences, Sbardelotto considers that the tax rules are becoming more flexible, but consider the control of expenses, as in Sweden. “In the past, there were simpler rules: primary surplus, nominal surplus, golden rule, but they led to an increase in the tax burden,” he said. The economist mentions that the rules that allow flexibility also establish limits. “There are automatic triggers for cutting expenses and, in times of recession, they allow for a temporary increase in short-term investments,” he said.
HOMEWORK In the opinion of the CEO of Azimut Brasil Wealth Management, Wilson Barcellos, a fiscal rule that considers the control of expenses will bring more peace of mind for the market to return to investing in the country’s growth. “All you have to do is do your homework and bring peace of mind for interest rates to fall,” he said. According to Barcelllos, this fight between the government and the Central Bank is useless. “At the next Copom meeting, the market may be in doubt as to whether interest rates will change because of inflation or pressure from the government. This creates uncertainty for investment agents,” he said.
For economist José Luis da Costa Oureiro, who served on the transition team of the current government, the spending ceiling was a mistake by the Michel Temer administration (2016-2018) and froze the Budget. “The government does not need to reinvent the wheel. Just take the European Union rule and bring it in, the whole world will accept it, ”he said. For him, the best solution is a rule that makes the Budget more flexible. “A more structured primary outcome that allows for flexibility for cyclical reasons,” he said. In the view of Banco Master’s chief economist, Paulo Gala, the rule based on per capita GDP growth is interesting. “The ceiling suffocated public spending. It wasn’t reasonable. We have to find the middle way, with priority given to health, education and social security”, he said. “The big pineapple is the Central Bank’s inflation target. With the current one, it will be difficult to cut the Selic rate. After the tax rule, there will be more room for this cut,” he said.
TAX REFORM As signaled by the analysts, the anchor needs to be accompanied by other measures, and here we enter another communication noise between the Executive and the Legislative: the Tax Reform. The project has been walking at a snail’s pace in the Chamber and is already bothering the government — which, in fact, still has no basis for approving anything. On Wednesday (8) the first meeting of the Working Group that discusses the issue in the Chamber was attended by the special secretary for Tax Reform of the Ministry of Finance, Bernard Appy. He reinforced that the government’s position is to keep exemptions and exceptions to a minimum, with a VAT rate hovering around 25%. “The more exceptions there are, the higher the rate has to be for other sectors, and that is a political decision.” He demanded speed from the group, conditioning the approval to the better performance of the economy and the reduction of the Selic rate.
To DINHEIRO, the coordinator of the Working Group, Reginaldo Lopes (PT-MG), stated that these issues will be dealt with in the necessary time and serve to mitigate the fears that involve such a huge change in the rules. “Everyone is afraid that the change will be abrupt. But it won’t be, and even after it’s approved there will be at least six years of transition,” he said. Perhaps he needs to read up on another of Newton’s laws, the first one, the one dealing with inertia.
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