Brazil: what is the fiscal framework approved by the House of Representatives?

On Tuesday night, April 23, the House of Representatives approved the basic text of the fiscal framework of the Lula administration.

If it wanted to make the life of the average Brazilian easier, the government would baptize the novelty fiscal plan or fiscal system.

In general terms, Haddad’s law retires two essential rules to keep the country’s economy on track.

One is the Fiscal Responsibility Law (LRF), approved in May 2000 during Fernando Henrique Cardoso’s government.

The second is the spending cap in 2016 during Michel Temer’s administration.

NO LICENSE TO SPEND

“The LRF created tougher rules for how governments should handle public accounts and made fiscal irresponsibility illegal,” said economist Hélio Beltrão.

“With this law, the government was obliged to establish in advance – and respect – the spending target for the next three years.”

Failure to comply with the LRF can cost a range of punishments, including impeachment or imprisonment for mayors, governors, and the president.

Ignoring these risks was one of the mistakes that shortened Dilma Rousseff‘s term, for example.

DILMA’S IMPEACHMENT

The spending cap created another essential rule for balancing the accounts: the increase in expenses for the following year must be limited to the current year’s inflation.

“Before the ceiling, governments used to increase spending on average 6% above inflation,” Beltrão recalls.

“The argument that such a limit compromises spending on education and security, for example, is a lie,” adds economist Marina Helena, who has held the Ministry of the Economy’s Directorate of Privatization.

“Brazil’s problem has never been lack of money, but money spent incorrectly. The ceiling forces the government to spend better.”

In counterpoint to the argument that the spending ceiling has already been exceeded on other occasions, as occurred during the Covid-19 pandemic, Beltrão ponders:

“For the ceiling to be pierced, it was necessary to approve a constitutional amendment in Congress. There was a long discussion.”

“The ceiling has already suffered reforms, but the overturning never occurred, as Lula and Haddad want now.”

The day’s proposal will cause an even bigger hole in the budget.

Codenamed Fiscal Responsibility Law 2.0, the framework authorizes the government to spend more and raise taxes.

While limiting spending to 70% of the increase in revenue, the bill replaces the spending cap with a “spending floor,” allowing spending to increase by at least 0.6% and at most 2.5% above inflation.

Among the taxes already created is the taxation, starting in 2024, of Brazilians with investments abroad.

For income between R$6,000 and R$50,000, the tax will be 15%.

Above this amount, the tax will reach 22.5%.

Income of up to R$6,000 is exempt.

Another proposal that did not advance in the original form was to tax retail companies like Shopee and Shein.

Haddad’s economic plan ignores any kind of punishment for the federal government.

“In practice, the government revokes the crime of responsibility,” says Beltrão.

Marina Helena adds: “The fiscal framework boils down to giving the government a blank check to spend at will, without the slightest responsibility.

The fear of being penalized favored the approval of important projects to control public spending, such as the Social Security Reform and the administrative mini-reform.

“Brazil’s main problem is the organization of public accounts,” reiterates Beltrão.

“The government spends too much and doesn’t want to stop spending. Cutting expenses is never an option.”

Excessive public spending and the gigantism of the state have always blocked the sustainable growth of the Brazilian economy.

With information from Revista Oeste

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