Brazil: New Fiscal Framework Revealed
The new fiscal framework which will substitute the Expenditure Ceiling Rule will have an expenditure rule which will restrict expenditure growth to 70% of revenues growth from the past year, a fiscal target with bands and a minimum investment requirement. The final text, which is yet to be presented, will be sent to the Congress which is likely to pass the rule with minor adjustments. We believe the new rule will have a positive impact on market sentiment although there still some doubts on whether the government will be able to comply with the rule.
Figure 1: Fiscal Result Target (% of GDP)
Source: Ministerio da Fazenda
Brazil’s Finance Minister Mr. Fernando Haddad has revealed in a press conference the new fiscal framework which will substitute the Expenditure Ceiling Rule. The new rule will be more flexible than the Expenditure Ceiling but still ensure a reduction of the fiscal deficit:
•Expenditure Rule: The rule will constrain federal expenditure growth to 70% of the growth of the revenues of the previous year, excluding some educational expenditure and health expenditure. This would ensure that expenditure would always grow below revenues, thus, reducing the fiscal deficits.
•Flexible Fiscal Target: The new rule will have a flexible fiscal deficit target with bands, similar to the inflation target. For 2023, the target would be 0.5% of GDP with a 0.25% band, for 2024 the target would be 0% with a 0.25% band; for 2025 the target would be a 0.5% primary surplus with a 0.25% band, and for 2026 a 1% fiscal surplus with a 0.25% band.
•Investments Floor: Investments will have a floor which is yet to be defined. Additionally, in case the government surpasses its fiscal target during a year part of the surplus could be used to finance investment.
We believe the fiscal rule goes on the right direction, showing the government wishes to reduce the deficit. However, as far as the fiscal rule is designed, this reduction would occur conditioned that GDP grows, and thus revenues grow. In case there is a recession, for example, the rule does not indicate how the government would proceed. Would they need to cut the expenditures? Additionally, government forecasts for growth in 2023 and 2024 are currently 1.6% and 2.3% respectively. We are forecasting quite lower growth at 0.8% and 1.7%, which we believe would jeopardize the fulfilment of the fiscal targets.
The final text, which is yet to be published by the Finance Minister, will now be sent to the Congress. We believe the measure will pass and it will have a positive impact on the markets. However, several doubts will remain on whether the government will be able to comply with the rule.