New Fiscal Framework: How to understand and navigate this new economic reality?

In order to stabilise the debt/GDP ratio, the New Fiscal Framework, proposed by the Lula government, foresees sufficient revenue for the country's growth.

The terminology is nothing more than the old and well-known: public spending rule that comes from the real plan.

The new fiscal framework is intended to replace the Michel Temer government's spending ceiling. However, the text of the bill has been criticised by the market and experts.  

What does the New Fiscal Framework propose?

The central aim is to keep expenditure below income each year, and in the event of surpluses, the money will only be used for investments. In other words, to reduce interest rates without direct interference from the Central Bank.

The bill replaces the Michel Temer government's Spending Ceiling, and was approved as a matter of urgency in the Chamber of Deputies last May by 372 votes in favour and 102 against. It went on to the Senate.

In practice, the bill guarantees that spending will grow year on year by at least 0.6%, corresponding to years of recession and no growth in revenue. 

In other words, the government will only be able to spend more when it collects more. This is one of the reasons why it has been criticised by opponents, the market and experts, because there is a great possibility of higher taxes being levied to achieve this goal.

In terms of comparison, the current Spending Ceiling makes the government spend in the following year what it spent in the previous year, plus inflation. And in the new Fiscal Framework, the basis is confidence that the economy will grow.

With regard to the content of the bill, the rapporteur, deputy Claudio Cajado (PP - BA), says that it was drawn up with suggestions from parties on the right, centre and left.

The president of the Senate, Rodrigo Pacheco, will resume the discussion and vote in June, after the Corpus Christi holiday, in the Economic Affairs Committee and will then take it to the plenary session, which may be amended according to the house rapporteur, Omar Aziz (PSD - AM).

In Claudio Cajado's view, revenue in the range of R$120 billion is needed to make the New Fiscal Framework viable, trying to reconcile the increase in revenue without increasing taxes.

What can we expect from the new economic reality?

The current president of the Central Bank, Roberto Campos Neto, said that the new fiscal rule does not guarantee an automatic reduction in the Selic rate. 

In the same vein, economics expert Alexandre Pires from Ibmec - SP says that the New Fiscal Framework trusts that revenue will happen, and that you can't do fiscal control through revenue expectations. 

Based on the statements of experts and opponents of the bill, there is uncertainty in the market about the effectiveness of the current text, as there is no guarantee that revenue will grow and taxes will be paid. 

The uncertainty is accentuated when compared to the current Spending Ceiling, where the control is on spending, and the government gets total control and chooses how much to spend, resulting in a higher percentage of success.

In short, the new economic reality is still uncertain, depending on the planned textual reforms and the imminent approval and enactment of the new fiscal framework.