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Monetary and fiscal policies need to dialogue, says prosecutor


On the 22nd, the Mixed Budget Committee must vote on the draft Budget Guidelines Law (LDO) of 2024. The following day, the proposal must be forwarded to the National Congress Bureau. The LDO establishes the precepts for preparing the General Budget of the Union and brings important indicators, such as the fiscal deficit target – a result between what the government expects to collect through taxes and other means and what it needs to spend for the functioning of the State and investments – which implies the possibilities of economic growth.

At the end of October, President Luiz Inácio Lula da Silva admitted that the government would “hardly” meet the fiscal target of zero deficit in 2024. Since then, there has been controversy surrounding public expenditure.

For Élida Graziane, attorney at the Public Ministry of Accounts of the State of São Paulo and professor of Public Administration at Fundação Getúlio Vargas (SP), the controversy distorts the vision of the problem. “We need to review Brazilian fiscal rules from this expanded perspective between revenues, expenses and public debt”, she highlights.

For Graziane, the fiscal imbroglio provides a smokescreen for distributive problems. According to her, “Brazil has a caste budget” and “defending austerity and only containing primary expenditure is keeping undertaxed wealth safe and extremely well remunerated in public debt.”

Check out the main excerpts from the written interview that the academic and prosecutor gave to Brazil Agency.

Brazil Agency: What difference does it make if we have public accounts with zero deficit in 2024 or if we have a deficit of 0.5%?
Élida Graziane: The level of the primary deficit is a political choice that, strictly speaking, does not necessarily have a negative impact on the intertemporal sustainability of public debt. It is necessary to demystify this false correlation that has been proclaimed in common sense that it would be fiscally irresponsible to hypothesize that the Budget Guidelines Law (LDO) would adopt a smoother trajectory of managing the primary deficit, which, in fact, has been registered by the federal government almost a decade ago.

It is necessary to clarify Brazilian society about the fact that public debt sustainability is an equation that takes into account both the consolidated level of debt (in terms of general government gross debt) and the country’s level of wealth and production (measured by Gross Domestic Product – GDP). If the country grows little or not at all, this is as serious or more serious for the intertemporal assessment of debt as the global volume of government revenue and expenditure itself.

Brazil Agency: In the LDO, which has not yet been voted on, and in the budget itself for next year, what worries you most?
Élida Graziane: There is a major distributive conflict in the debate on Brazilian tax rules. It is necessary to highlight those who take advantage of this thick smokescreen that prohibits the country’s medium-term planning.

Imposing short-term fiscal constraints benefits both agents who price debt risk and are remunerated with higher interest rates, and parliamentarians who bargain for greater budgetary space for their parochial amendments.

Even though they are driven by different motives and purposes, both groups qualitatively frustrate the republican agenda of the Multi-Year Plan (PPA), because they benefit more from the short-term, cash-strapped management of budget execution that the contingency entails.

Brazil Agency: In a post on X (formerly Twitter), you wrote that “inequality is a budgetary choice.” In a live broadcast, you said that “there is a clear way to organize priorities in the Brazilian budget to reproduce and maintain inequality.” Could the goal of zero deficit in 2024 generate an increase in inequality in the country? If yes, how?
Élida Graziane: The great inequity of the Brazilian budget cycle lies in the fact that undertaxed wealth has certainly been very well remunerated in public debt. Now, surplus agents in the economy do not pay taxes according to their ability to contribute and refuse to be called upon to do so. On the other side of this tension, there are political agents unwilling to allocate resources through planned agreements, because they aim to maximize their short-term electoral returns, managing balkanized releases of parliamentary amendments and parochial tax benefits.

Brazil Agency: Can social areas lose resources in 2024 with the zero deficit target?
Élida Graziane: Without equity in the legal regime of public accounts, only primary expenses are subject to adjustment. Thus, the very quality of essential public services remains precarious and public debt has been worsened, in a vicious circle of social inequality that is reproduced, sedimented and made invisible within the public budget. It is worth warning that, if planning orders incompressible priorities, there must be an instrumental relationship between revenues and this constitutionally necessary size of the State.

Brazil Agency: In your opinion, pursuing a zero budget deficit or even a surplus in public accounts are not relevant at this time for economic growth?
Élida Graziane: Balance in public accounts requires going beyond the selective adjustment approach restricted to primary expenses, as was done by the ceiling given by Constitutional Amendment 95/2016 and as unfortunately seems to be repeated now with Complementary Law 200/2023. It is also necessary to address inequity and inefficiency in revenue management and to minimize the opaque and unlimited repercussions of financial expenditure on the public debt, which reveal, among other dimensions, the fiscal impact of the Central Bank’s decisions in the scope of monetary, credit and exchange rate policies. Fiscal and social responsibility come together when government revenues, all state expenses (primary and financial) and public debt are effectively regulated and well managed.

Brazil Agency: The minutes of the Monetary Policy Committee point out, among other points, that “uncertainties about the stabilization of public debt have the potential to increase the interest rate.” Isn’t the zero deficit target positive for reducing interest rates and, therefore, better conditions for business investment and family consumption – and with this GDP growth?
Élida Graziane: If there is only a diagnosis of fiscal risk in the intertemporal funding of fundamental rights, we forget to improve the other dimensions that also impact public debt. One cannot speak of a legal regime for public finances only selectively containing primary expenses and ignoring the inequities of other axes. This is why reflections on possible distortions in the Central Bank’s actions are timely and necessary.

Certainly, there would be greater impersonality and equidistance of the Central Bank in relation to the financial market, if there were more robust rules for prior and subsequent quarantine of directors with a fixed mandate in the autarchy.

Although it is clear that the main purpose of the Central Bank is to manage currency stability, its actions cannot ignore the fact that there are complementary objectives in its legal autonomy regime. Economic cycles must also be smoothed and, as much as possible, efforts must be made to increase the level of employment in the economy.

Given its significant repercussion on public debt, monetary policy needs to dialogue with fiscal policy, under penalty of establishing an implicit polarization between currency stability and the funding of fundamental rights, which tends to compromise, as a rule, only the latter.

It is equally relevant to point out that measuring the sustainability of the public debt trajectory is closely related to the GDP growth pattern, especially because the monitoring parameter we adopted is the relationship between the General Government Gross Debt (DBGG) and the GDP, or That is, numerator and denominator matter.

Brazil Agency: Returning to social media, in one of them you pointed out that “defending austerity and just containing primary expenditure is keeping undertaxed wealth safe and extremely well remunerated in public debt.” In her opinion, should the country increase taxation on income from public bonds? Wouldn’t that scare away investors?
Élida Graziane: For our country to once again promote investments and unlock the ability to progressively implement fundamental rights in light of the 1988 Constitution, we need to review Brazilian fiscal rules from this expanded perspective between revenues, expenses and public debt. On the one hand, there is an urgent need to improve revenue management, seeking to make them more progressive and efficient; reviewing, for example, tax exemptions; facing the voluminous stock of active debt, which is not collected as it should, etc.

There is an undeniable disparity in this chaotic and regressive Brazilian tax matrix, where taxation on production and consumption is burdened instead of effectively taxing assets and income. On the other hand, we need to monitor, at least through the prism of the principles of motivation, transparency and proportionality, the impact caused by financial expenses on public debt. The asymmetric perception of fiscal risks has imposed selective adjustment routes only applicable to primary expenses, and such a normative arrangement of fiscal rules is iniquitous, as it sometimes promotes an inversion of constitutional priorities in the budget cycle in the various entities of the federation.

Brazil Agency: Isn’t the State’s mechanism for raising public resources through public bonds better than raising taxes or issuing more money?
Élida Graziane: The option to finance mandatory expenses that are not subject to contingency through debt generates intertemporal unsustainability of debt, when the country, over the years, strongly inhibits tax collection, as happened with the expansion of tax exemptions and the reiteration of almost of successive tax debt repayment programs (Refis), which explains the low collection capacity of active debt and the moral risk of ostensible tax avoidance. Here, in particular, a parenthesis is in order: most tax exemptions are granted without adequate monitoring of the counterparts that justified them and are valid for an indefinite period, which gives rise to permanent tax privileges.

Brazil Agency: You also described that Brazil has a “caste budget”, with regressive taxation, tax waivers and tax evasion rewarded by the various editions of Refis. What do you expect from tax reform?
Elida Graziane:

Brazil has this profound imbalance in relation to who pays and who fails to pay the bill for life in society, even when they have a greater ability to contribute.

Tax regressivity is, in a way, the other side of the coin of the high cost of carrying public debt, insofar as the undertaxed liquidity of surplus private agents has been very well remunerated in public debt. This seems to me to be one of the most notable impasses in our public finances, which ends up constraining the effectiveness of the fundamental rights provided for in the 1988 Constitution.

Brazil Agency: Finally, one last sentence from you: “democracy only becomes real if we manage to impact the budget in all its conceptions.” Is the fuss surrounding zero deficit a sign that we are on this path or the opposite?
Élida Graziane: We live under a balkanized and irrational dispute, at all times, for scarce resources, without even fulfilling the basic set of expenses already defined as programs of continuous duration in the PPA and as mandatory expenses not subject to contingency in the LDO. The waiting lists for assistance and social security benefits, the judicialized liabilities, the remaining payments and regulatory omissions are examples of neglect in the legitimate ordering of priorities made by the PPA and the LDO.

It is necessary to return this pedagogical construction to society more clearly than the State is expected to deliver over time, so that so many judicialized liabilities do not accumulate, so much precariousness of essential public services and so much ineffectiveness of fundamental rights.

The article is in Portuguese

Tags: Monetary fiscal policies dialogue prosecutor



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