PEC is not a solution and extraordinary credit can pay aid, says economist

Making yet another amendment to the Constitution, through the PEC of the Explosion, to circumvent the spending ceiling and obtain permission to spend more is not the ideal way to solve the lack of money to maintain the Auxílio Brasil or a new Bolsa Família in 2023, according to economists consulted by the CNN Brazil Business 🇧🇷

This is because the succession of PECs approved in the last two years to generate extra funds for the government ended up wearing out the tool. This was the case, for example, of the Emergency PEC, the Precatorios PEC and the Benefits PEC, nicknamed “Kamikaze”, all enacted in the 16 months between March 2021 and July 2022.

In a recent article on the subject, economist José Roberto Afonso, considered one of the fathers of the Fiscal Responsibility Law (LRF), argues that, instead of yet another Proposed Amendment to the Constitution, how does the transition team of President-elect Luiz Inácio Lula da Silva, that extraordinary credit be used to raise the money needed to pay Bolsa Família next year.

Extraordinary credits, he says, are a tool already provided for by law – including the spending ceiling itself -, they do not require a change in the Constitution and are enough to urgently remedy the lack of funds in the current project for the Budget of the year that he comes.

“There is nothing more urgent in Brazil than fighting the hunger and misery that plague tens of millions of Brazilians”, said Afonso in an article on the subject, entitled “Basic income can be financed by extraordinary credit”.

“Without having to change the Constitution, it is perfectly feasible for the new federal government, if it wants to, to meet this priority by taking advantage of the fiscal rules already in force”, he adds.

The article is signed by Afonso, who is a professor at the University of Lisbon and at the Brazilian Institute of Teaching, Development and Research (IDP), together with the Public Prosecutor of the Public Ministry of Accounts of the State of São Paulo Élida Graziane Pinto and the analyst of Senate for public budget Leonardo Ribeiro.

provided in the ceiling

The spending ceiling, included in the Constitution, also by PEC, in 2016, allows government expenses to grow only the same as inflation. The rule itself provides, however, for extraordinary credits as one of the few exceptions released from complying with the limit.

The government can resort to these credits only for situations considered “unpredictable” and “urgent” – which, for Afonso and his colleagues, is the current case.

“The social indicators observed after the pandemic support the urgency”, they say, “and there is no greater factor of unpredictability than the lack of forecast of resources in the budget bill for 2023 to maintain the amount currently paid to families in serious situation social vulnerability”.

Assistance of BRL 400

The project for the 2023 Budget presented by the government of Jair Bolsonaro set aside the necessary funds to fund a Brazil Aid of just R$ 400 – currently, the benefit is paid temporarily in the amount of R$ 600, thanks to the Kamikaze PEC of July.

Both Bolsonaro and Lula promised, however, —and economists inside and outside the financial market agree—, that the value should be maintained at R$600 from 2023 onwards as well.

To deal with this, Lula presented the PEC of the Explosion, in debate with parliamentarians, in which he asks for almost R$ 200 billion more and outside the spending ceiling to be able to afford this and other social programs. The future president has also already said that he wants to rename the program back to “Bolsa Família”.

Excess of PECs

“Amending the Constitution practically once a semester does not bring any fiscal security, in addition to impairing the quality of the Brazilian budget cycle, to the extent that it becomes almost impossible to plan for the medium term,” he told the CNN Business Élida, one of the co-authors of the article and also a professor at the Getulio Vargas Foundation (FGV).

“In the last 20 months, there have already been three constitutional amendments that have proved to be insufficient and even more insecure to meet the purpose of safeguarding food aid to the vulnerable”, he added.

Economist and professor at Insper Juliana Inhasz also criticizes the use of a PEC, a type of project that changes the Constitution and requires a high number of favorable votes to be approved in Congress, although she believes it is difficult to exit due to extraordinary credits. “I don’t think it’s a case of unpredictable expenses,” she says.

“Using the PEC to finance extra spending in 2023 is a complex path,” she said.

“The government gets revenue to achieve its objective, but at a high cost. It will end up generating a significant increase in public debt and will need to convince a Congress that is not so favorable to it to approve the proposal, under the penalty of having to make numerous concessions and divisions of the resource with that same Congress.”

According to the chief economist at Galapagos Capital, Tatiana Pinheiro, although the financial market was already willing to accept some exception to the spending ceiling to make adjustments to the social policies of the 2023 Budget, the ideal would be, in the following years, to make cuts on other fronts to be able to accommodate income-back programs within the allowable spending limit.

“From the fiscal policy point of view, the ideal would be to re-discuss spending, to see the priorities and to see where to reallocate it”, he said. “Our budget is not small, it foresees BRL 1.8 trillion in expenses for next year, but there is a part of the expenses that is not well addressed.”

Projections made by her indicate that, if an expenditure of R$ 200 billion is maintained outside the spending ceiling throughout Lula’s term, and without a counterpart cut or new source of revenue on another front, the public debt, which today is in 77% of GDP, it could reach something between 95% and 110% by 2026. “We’ve never reached that much”, said Pinheiro.