Treasury study group suggests new anchor that conditions spending on net debt

Treasury officials presented this Monday a new proposal for a fiscal anchor that aims to replace three rules currently in force with just one, which limits real growth in federal government spending to the path of net debt.

In general terms, the rule proposes that the lower the level of the government’s net debt, the greater the real growth rate of its expenditures, and this flexibility to spend increases more when the debt is on a downward trajectory compared to the period recently and also when the accounts are in surplus.

Currently, the main fiscal anchor in force is the constitutional spending ceiling, which since 2017 limits the growth of public expenditure to the inflation of the previous year.

Throughout President Jair Bolsonaro’s term, the ceiling was ignored on different occasions, contributing to the discrediting of the rule.

President-elect Luiz Inácio Lula da Silva, who takes office on January 1, has already said he will abolish the spending cap, but has yet to present an alternative proposal for a fiscal anchor, prompting speculation in the markets about his future economic policies.

At least since 2019, the Treasury has been discussing the creation of a rule to establish a fiscal anchor based on the evolution of public debt. In August of this year, technicians from the body announced that the new model could be presented in 2022, after the elections.

A second proposal was being prepared at the Ministry of Economy by order of Minister Paulo Guedes, but has not yet been officially presented.

According to a technical presentation made by a member of the minister’s team at a closed event, to which Reuters had access, this rule would authorize a real increase in spending depending on the advance of GDP and the level of gross public debt. In periods of recession, increased expenses would be released regardless of the level of indebtedness.

The Treasury emphasizes in the document that “the opinions expressed in these works are exclusively those of the authors and do not necessarily reflect the views of the National Treasury Secretariat, the Special Secretariat for Finance or the Ministry of Economy”.

New proposal

The text for discussion released this morning highlights that the net debt, and not the gross debt, “better reflects the impacts of fiscal policy and minimizes constraints in the management of monetary policy or in the management of public debt”.

Currently, the Brazilian net debt, which also takes into account government assets, especially international reserves, is 58.3% of GDP.

According to the Treasury’s proposal, with the indicator above 55% of GDP, expenditures could grow by 0.5% a year in real terms, but only if the indebtedness trajectory is declining. If it is high, there could be no real growth in spending.

With debt between 45% and 55% of GDP, real expenditure growth can reach 1% per year if the trajectory is downward, but it could be only 0.5% in the case of an increase. For debts below this level, the authorized growth will be 2% or 1% per year. In all cases, the government earns a “bonus” on its 0.5% expenditure growth limit if the primary result of its accounts is in surplus or is above a certain threshold.

The idea is that the limits are set every two years. The debt trajectory will be considered increasing when the average indebtedness of the last 12 months is higher than that observed in the previous 24 months.

Brazil also has to meet a primary budget balance target established by law every year, and also the so-called golden rule, which prevents the government from issuing debt to finance current expenditures, such as salaries and social benefits.

Since 2014, the central government, composed of the Treasury, Central Bank and Social Security, has presented primary deficits. With public spending outstripping revenue, the administration has continually sought congressional authorization to flout the golden rule.

*With CNN Brasil Business