‘War budget’: where can the billions come from to rebuild Rio Grande do Sul

Just rebuilding highways destroyed by floods in the South should cost at least R$1 billion, according to an estimate by the Minister of Integration and Regional Development, Waldez Góes.

The floods affected more than 1.3 million people, according to the state administration, with at least 100 deaths and 155,700 people displaced from their homes. Many are without electricity or drinking water.

Negotiations to release resources take place amid fiscal restrictions that affect both the Union and the State, as both are in the red.

Among the measures under discussion is the suspension of payment of Rio Grande do Sul’s debt to the federal government (which could release R$3.5 billion this year), the authorization of extra funds outside the Union’s spending limit, and the relocation of expenses already foreseen in the Budget, such as parliamentary amendments (resources that deputies and senators can use in investments and public policies).

Proposals to amend the Constitution (PEC) with this content have already been presented by deputy Fernanda Melchionna (PSOL-RS) and senator Alessandro Vieira (MDB-SE).

The idea, however, is being criticized by public accounting experts who consider that the “war budget” would bring excessive flexibility to fiscal rules.

In the view of these analysts, there are other mechanisms to guarantee extra funding for the State outside the Union’s spending limit, without the need to change the Federal Constitution.

The main one is the adoption of extraordinary credits in emergency situations.

This option is already authorized, after Congress approved on Tuesday (7/5) a proposal for a legislative decree presented by President Luiz Inácio Lula da Silva establishing a state of public calamity in Rio Grande do Sul, until December 31, 2024.

This will allow the government to release resources beyond the year’s spending limit and deduct this expense from the primary result target (difference between non-financial income and expenses).

The goal established by the 2024 budget law is for the government to reverse the deficit recorded in previous years and close the year at zero, that is, without saving or spending more than it collects.

In 2023, the Union recorded a primary deficit of R$230.5 billion, a value equivalent to 2.12% of the Gross Domestic Product (GDP).

Despite the goal of closing the gap this year, a survey carried out by the Central Bank on a weekly basis shows skepticism on the part of the financial market. The median analyst projections for this year are a deficit of 0.67% of GDP.

Defenders of reducing the deficit say that balancing public accounts contributes to reducing inflation and interest rates charged in the country, with positive impacts on economic growth.

Critics of fiscal austerity measures say that spending cuts reduce the quality of public services and government assistance to the poorest.

President Lula once again guaranteed on Tuesday the rapid release of emergency resources through ministries.

He highlighted that the total amount that will be needed to recover the State is not yet known and said that the federal government “will work together with the governor [Eduardo Leite, do PSDB] in a project.”

“The initial difficulty is that no mayor – the governor said this clearly last Sunday – is aware of the damage that has been done. For now, people imagine, they think. But we will only have the real state when the water download and we can see what actually happened in Rio Grande do Sul”, he said in an interview with radio stations during the program “Bom Dia, Presidente”, produced by Empresa Brasil de Comunicação (EBC).

“What I can guarantee is that there is 100% will from the Chamber, the Senate, the Court of Auditors and the Judiciary for us to make resources as easy as possible,” he added.

Economist Gabriel Barros, former director of the Independent Fiscal Institution (a body linked to the Senate), considers an increase in spending to support the recovery of Rio Grande do Sul to be inevitable, but is against the “war budget”.

“It is not necessary because ordinary credit is sufficient to provide necessary solidarity to the State and has already been used in previous similar situations, for example times of drought in the Northeast”, he explained.

In his assessment, changing the Constitution to authorize extra spending risks an uncontrolled increase in expenses, at a time when public accounts are already tight.

For Barros, the government has made a mistake by focusing fiscal adjustment mainly on generating new revenue, with more taxes or withdrawal of tax benefits, without seeking to contain spending.

He criticizes, for example, the decision to readjust the minimum wage this year above inflation (to R$ 1,412), an expense that puts pressure on public spending on Social Security, unemployment insurance and BPC (Continuous Payment Benefit, minimum wage paid to the elderly and low-income people with disabilities).

The government says that this policy reduces poverty and stimulates the economy, by putting more money into circulation.

For Barros, the government’s strategy leaves no room for public accounts to react to exceptional situations, such as the floods that hit Rio Grande do Sul.

“The government’s preference is to increase expenditure and this decision is exhausting all the fiscal space that existed”, he criticizes.

Author of one of the “war budget” proposals, Rio Grande do Sul deputy Fernanda Melchionna says that the measure is necessary in view of “a reconstruction that will be long, difficult and in many areas”.

In his view, it is necessary to adopt not only recovery measures, but also to prepare the State for new episodes of heavy rains, as environmentalists claim that climate change will intensify extreme events such as the floods that hit Rio Grande do Sul.

“The warning and monitoring systems themselves need to be expanded. Climate change is here and we need to mitigate the impacts of a new normal that, unfortunately, is here to stay, in the sense of environmental catastrophes”, argues Melchionna.

The deputy also remembers that Rio Grande do Sul has a historical problem of high debt that limits the State’s investment capacity.

Due to high interest rates, the debt with the Union grew 13% in 2023, totaling R$92.8 billion, according to data from the State Secretary of Finance.

His proposal for the “war budget” foresees the suspension of payments and that all resources used to recover the State will be deducted from the debt.

The Minister of Finance, Fernando Haddad, said this Wednesday (8/5) that the government should define the rules for suspending the collection of Rio Grande do Sul’s debt this week.

Even before the floods, the Treasury was already discussing the renegotiation of interest paid by Rio Grande do Sul and other states with high debt, such as Rio de Janeiro, Minas Gerais and São Paulo. According to Haddad, these conversations will continue regardless of the suspension of Rio Grande do Sul’s debt.

Melchionna also proposes social benefits for families who lost homes and possessions in the floods. The measure is also defended by other parliamentarians.

The PSDB bench in the Chamber is proposing the creation of “Socorro Emergencial Gaúcho”, a monthly benefit of R$600 for affected families.

While the release of extra resources is negotiated, the government announced the reallocation of resources already foreseen in the 2024 Budget.

The Minister of Institutional Relations, Alexandre Padilha, said on Tuesday that the federal government will open, in May, a window so that deputies and senators can reallocate part of their parliamentary amendments for emergency actions in Rio Grande do Sul.

According to him, this will make it possible to redirect resources that would go towards works and equipment purchases, towards more immediate spending on helping flood victims (civil defense, health and social assistance).

“Just from the Rio Grande do Sul bench, it means R$448 million”, he stated, highlighting that parliamentarians from other states will also be able to redirect their amendments to Rio Grande do Sul.

Furthermore, Padilha said that the government hopes to approve on Thursday (9/5) in the National Congress an amendment to the Budget Guidelines Law (LDO) that would release an additional R$480 million in special transfers to the municipalities of Rio Grande do Sul, within the so-called “pix amendments”, which go directly into city halls’ cash.

The LDO rapporteur, deputy Danilo Forte (União-CE), argues that another R$ 2 billion can be allocated from parliamentary amendments for the recovery of Rio Grande do Sul.

According to his proposal, these resources would come from the R$5.6 billion foreseen for committee amendments (resources that parliamentarians can allocate through the House and Senate committees) in the 2024 Annual Budget Law (LOA), which were vetoed by the president Lula, precisely as part of the effort to reduce the hole in public accounts.

The expectation, however, is that Congress will override this veto, freeing up the resources.