Government puts forth revamp for public spending cap

New fiscal rules should limit the increase in public spending to 70 percent of the growth in revenue reported in the previous 12 months, Brazil’s Ministry of Finance announced Thursday (Mar. 30). The new system combines more flexible restraints with the country’s targeted primary balance (public accounts excluding net interest payments).

The proposal is designed to replace the current spending cap introduced in 2016, which limits the rise in expenditures to the previous year’s ceiling corrected for inflation.

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The bill pends congressional approval and sets new upper and lower limits to how much the government is allowed to disburse. In times of growth, expenditures must not surge over 2.5 percent a year above the inflation. Under economic contraction, conversely, spending should not surpass 0.6 percent a year above inflation.

To prevent non-compliance, the draft lays out penalties and slowdown strategies that can make the ceiling reach 50 percent of the variation in revenue.

Each year, the targeted primary balance should fluctuate within a tolerance margin of 0.25 percentage points of the nation’s GDP.

The government’s economic staff underscored that the 70 percent cap is based on past rather than estimated future revenues. As a result, neither subsequent governments nor Congress will be able to raise revenue forecasts artificially in a bid to boost spending.

Finance Minister Fernando Haddad noted that the new regulations allow for self-correction, which should make things easier for public decision makers.

“There must be room for self-correction. As good as the intentions of public managers may be, the leaders themselves will be hard-pressed to make adjustments if they can’t find tools for correction,” he stated.