Untying the fiscal knot is a difficult task, economists say

By ETCO
26/09/2007

Source: Valor Econômico, 26/09/2007

The size of the tax burden and the rapid expansion of public spending in recent years are major obstacles to growth, according to economists of different trends. How to untie the fiscal knot, however, is a far more complex task than the almost consensual diagnosis of the problem suggests, as was clear yesterday in a debate held yesterday at the Faculty of Economics, Administration and Accounting at the University of São Paulo (FEA-USP ). The event's coordinator, ex-minister Antonio Delfim Netto insisted that there are no magic solutions. For him, there is no way to cut public spending. The solution, according to Delfim, is to stabilize expenses in per capita terms and, gradually, reduce the tax burden as a proportion of GDP.

Professor Celso Martone, from FEA-USP, defended what he called an “inversion of the fiscal equation”, suggesting that taxes be cut first, and then the political system would define its priorities based on available resources. Professor Fabiana Rocha, from FEA-USP, focused her analysis on the need for the country to strengthen institutions related to the handling of public accounts, proposing the creation of a body similar to the Monetary Policy Committee (Copom) for the fiscal area.

Martone defended the most controversial idea of ​​the debate. Not satisfied with the voracious expansion of the tax burden, which ended 2006 at 34,4% of GDP, Martone made a radical proposal. For him, it would be important to freeze the tax burden and public debt in real terms. Thereafter, federal contribution rates (such as the CPMF) would be reduced year by year, so that they would generate the same revenue in real terms (discounting inflation). “With an average annual growth of 4%, contributions would be eliminated in six years and the tax burden could fall by the equivalent of 10% of GDP.” There would first be a definition of the resources available to the public sector, from which the political system would choose its priorities. "It's how it works in private life," he said.

Martone's idea was widely criticized. Delfim asked economists to include the urn in their models. “The Brazilian State received a mission from the Constitution that it has to fulfill”, summed up Delfim, for whom social policies are not a government invention. For him, the path goes through stabilization, in terms of capital of public spending.

Former executive secretary of the Ministry of Finance Amaury Bier, a partner at Gávea Investimentos, also saw problems in Martone's proposal. For Bier, the measure is not credible, since various expenses, such as expenses with personnel, social security benefits and health, tend to grow above inflation. In order to make Martone's proposal viable, it would be necessary to tightly compress the other expenses, which does not seem possible. Bier said that the appropriate strategy is to insist on controlling spending and reducing budgetary rigidity. He defended a series of constitutional amendments that address issues such as Social Security spending and the linkages between revenues and expenses.

Fabiana spoke of the fragility of fiscal institutions. She recalled the advances that have occurred in the last 20 years, such as the creation of the Treasury Department, the removal of the Central Bank (BC) from financing public expenditure and the adoption of the Fiscal Responsibility Law (LRF). The point is that there are problems in this area, she recalled, pointing to the weakening of the LRF. One is the lack of punishment for government officials who violate the rules defined by law.

With one way of strengthening institutions, Fabiana defended the creation of a fiscal policy committee. This “fiscal Copom” would, among other functions, have to define the primary surplus target, make predictions about the behavior of fiscal variables and study the impact on the growth of fiscal policy measures. As a result, the public sector would have greater knowledge of the composition of spending and its effect on activity.

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