“The ceiling is a flag, not a dogma”, says Paulo Guedes

The Minister of Economy, Paulo Guedes, confirmed to the CNN that his team is studying the creation of a targeting system for public debt. According to him, this is a way of strengthening the country’s fiscal framework.

The head of the economic team denies that the intention is to end the spending cap rule. He says that the plan is to add other control instruments to the legislation. “The ceiling was a useful tool to control recurring expenses, to prevent the public machine from swelling. Just like interest rates are a useful tool to control inflation. But there are other tools that are not the ceiling”, says Guedes, “The ceiling is a flag, not a dogma”, he says.

The project under study by the economic team would establish a target for the relationship between public debt and Gross Domestic Product (GDP), including a tolerance band, similar to what is already done with the country’s inflation targeting system.

Defined by the National Monetary Council (CMN), the inflation target is currently 3.5%, with a tolerance interval of 1.5 percentage points up and down. It is with this goal in mind that the Central Bank guides its decisions on what the basic interest rate, the Selic, should be.

According to Guedes, the plan, therefore, is not to end the spending cap, but to present other mechanisms to monitor and – try to tame – government spending. “The ceiling will not end, but it will gain additional control tools: floor locks, privatizations, deleveraging of public banks”, explains Guedes. “The ultimate goal is to stabilize the debt-to-GDP ratio at comfortable levels.”

The economic team has been debating internally the creation of a targeting system for public debt since the first months of the year. According to the ministry’s technicians, there was an intention to propose a debate on the subject in the second half of the year, including the proposal of “triggers” to increase or hold public spending from the follow-up of the goal.

This idea is related to Guedes’ plan to create a new fiscal framework for the country. He had already proposed, for example, the creation of the Fiscal Council of the Republic during the debate on emergency measures to face the pandemic.

The final format of the proposal to create the targeting system for public debt is still being studied. Members of the economy believe that the ideal would be a target of around 60% for the debt/GDP ratio, with a tolerance band of more or less ten percentage points.

Today, public debt represents 78.2% of the country’s GDP. Although the final model is under discussion, there is no intention on the part of the economic team to disclose the final results before the election, guarantee members of the Ministry of Economy. There is fear of contaminating the president’s agenda and campaign promises.