The most commented subject this week was the new fiscal framework that is being planned by the Minister of Finance, Fernando Haddad. The measure encompasses some controversies, such as the end of the tax exemption for shipments between individuals with amounts up to US$ 50, or R$ 250 at the current exchange rate.
But, after all, what is a fiscal framework? What are the government’s goals with it? Check out this and other answers in this article from Canaltech.
What is a tax framework?
The fiscal framework consists of a set of rules that aims to control public accounts, preventing the government from spending more than it collects. The term arcabouço, which means “skeleton” or “foundation”, refers to the norms that will guide Brazilian fiscal policy.
What is the purpose of the fiscal framework?
The new rules replace the old spending ceiling, in effect since the Temer government, and its main objective is to prevent the growth of public debt by controlling spending. If the public debt grows too much, the market becomes insecure and starts to increase interest rates for loans, for example, leading to price inflation.
The measure aims to increase the predictability of finances and, consequently, confidence on the part of economic agents, so that interest rates decrease. This is necessary, because an economy with high interest rates, for a long period, affects society as a whole, reducing investment returns and purchasing power, in addition to increasing unemployment and recession.
In this scenario, the framework is an important factor in decision-making by investors and creditors, as the trajectory of the public debt is considered in their analyses. If the debt is showing a growing graph in relation to the Gross Domestic Product (GDP), with no signs that it will be controlled, the agents will understand that the debt risk is high and will start offering higher interest rates.
What are the new rules provided for by the fiscal framework?
The new framework rules cover four basic points, check them out:
1. Expenditure growth linked to revenue growth
In the expenditure ceiling, the increase in public expenditure was linked to the Extended National Consumer Price Index (IPCA), so that the government could only spend the equivalent of the previous year’s inflation. In the case of the fiscal framework, the increase in expenses must accompany the growth in public revenues, with a limit of 70%.
In this way, if revenue increases by 2% from one year to the next, government spending can only increase by 1.4%. The calculation of the amount to be spent in the next year is based on the net primary revenues of the last 12 months until June of the current year. These revenues include taxes, transfers received from other public entities and royalties.
It is worth noting, however, that spending on health and education is an exception to this rule, as it has undergone drastic reductions in recent years. Expenditures for these areas will be readjusted in accordance with the rules before the spending cap, forecasting growth of 15% in revenue for health and 18% for education.
According to minister Fernando Haddad, the previous rules greatly undermined the movement of economic recovery in periods of recession. As he explains, the new rules expand “the space to give sustainability to public accounts, but without absolute rigidity, as social demands are there and need to be met, in a responsible manner”.
2. Definition of a ceiling and a floor for the increase in expenses
The new norms define a minimum limit of 0.6% of expenses and a maximum of 2.5%. If, from one year to another, revenue grows 5%, the 70% rule predicts that 3.5% can be spent. However, the ceiling of the increase must respect the limit of 2.5% – so that a reserve can be formed for moments of greater contraction of the economy.
In the event that revenues do not evolve significantly in the 12 months of reference, public spending may be increased by 0.6%. For Haddad, this avoids situations of rigidity in the budget that do not allow dealing with exceptionalities.
“This prevents the State from becoming disorganized, especially when the citizen’s right to constitutionally established services is involved. This way, there is more security not only for the entrepreneur who wants to invest, but also for the families that need government support”, explains Haddad.
3. If the target is not reached, the expenditure should reduce further in the following year
The new fiscal measure also aims to reduce the current fiscal deficit, which occurs when government expenditure exceeds revenue. According to the government, the proposal aims to zero the deficit by 2024 and, from 2025, to reach a fiscal surplus of 0.5% of the GDP — obeying the limit of 0.25% both upwards and downwards.
In this way, the objective is that the fiscal surplus should be between 0.25% and 0.75% of GDP from 2025. If this does not happen, the following year will only be able to increase expenses by 50%, not 70% . In the previous rules, the primary surplus target was a fixed amount, which did not make much sense for the new minister:
“You don’t stick a number and run after it with two digits after the decimal point, as was done in Brazil. Instead, you follow a trajectory, and if the goals are not achieved and fall short of the band, there are mechanisms for correction for the following year”, explained Haddad.
4. Floor for investments
Finally, the fiscal framework also considers a floor of approximately R$75 billion, adjusted for inflation each year, for investments. That is, in the case of resources exceeding the previously mentioned band, the surplus can be used by the government for investments in works for the population.
Did the framework create new taxes?
Regarding the controversy over imported purchases on e-commerce platforms, such as Shein, Shoppe and AliExpress, the minister claims that no new tax has been created. According to the Federal Revenue, purchases of up to US$ 50 (R$ 250) were always taxed, however, these companies and other entrepreneurs would be using irregular devices to evade taxes and circumvent the system.
The difference is that, now, inspection will be reinforced and, therefore, more products will be taxed. The only range exempt from taxation continues to be shipments from an individual to another, which do not constitute a commercial transaction — there are also specific cases, such as medicinal orders. It is not yet clear, however, whether or not the government will maintain the exemption for these cases.
