Author: Ribamar Oliveira

Source: Valor Econômico - São Paulo / SP - BRAZIL - 26/08/2010

It is a mistake to believe that Brazil needs a tough fiscal adjustment, similar to that undertaken by President Lula in his first term. The reality today is completely different, since inflation is under control, the country's international reserves are at record levels and the net public sector debt is expected to stand at 39,6% of the Gross Domestic Product (GDP) at the end of this year (against 55,5, 2002% of GDP in 2005). The problems facing the future president are of a different nature. The government needs to make room in the Budget for public investments and guarantee long-term financing for companies. To solve the first problem, former Finance Minister Antonio Palocci presented, still in XNUMX, an alternative that will probably be considered by the next government.

The fiscal policy proposal formulated by Palocci at that time was never very well understood. It does not foresee cutting costs, it does not foresee a reduction in the salaries of civil servants or any drastic adjustment in public accounts. It merely proposes that current primary expenditure increase at a slower pace than GDP growth. Current primary expenditures do not include investments and interest payments on public debts. The idea is that if the government commits to this strategy, giving a long-term horizon for fiscal policy, it will facilitate the drop in interest rates to international levels.

It should be noted that, since the 1990s, current primary expenditures by the federal government have grown faster than GDP, which has required a continuous increase in the tax burden. From 2002 to 2009, for example, current primary expenditures went from 14,89% of GDP to 17,18% of GDP, according to data from the Ministry of Finance.

In the same period, investments went from 0,83% of GDP to 1,02% of GDP. In other words, current spending has increased a lot and investments, very little. To accommodate the increase in spending, federal government revenue jumped, in the same period, from 21,66% of GDP to 23,52% of GDP. In other words, the tax burden went up.

The question that arises is that current primary spending cannot continue to grow at this rate, as the government needs to increase public investments and the space for increasing the tax burden is small. Experts say that there will be some growth in the load due to the increase in the formalization of the economy and the efficiency of the collection machine, as occurred in recent years.

It is also believed, in the technical area, that Congress will approve the PT proposal, with the support of the PMDB, to create the Social Contribution for Health (CSS), along the lines of the extinct Provisional Contribution on Financial Transactions (CPMF), with rate of 0,10%.

Palocci's proposal opens up space for investments as follows: if GDP shows real growth of 5%, current expenses could increase 4%, for example, also in real terms. Each year, they would grow less than GDP, so that the difference would be filled by investments, keeping total primary expenditure at the same proportion as GDP.

Although former Minister of the Civil House Dilma Rousseff considered the Palocci proposal “rudimentary”, when it was initially presented, President Lula resumed the idea in 2007, when he sent a bill to the National Congress, determining that personnel expenses they could not rise more than 1,5% in real terms per year. The bill has not yet been voted on.

The idea of ​​creating limits for the expansion of current expenditures is likely to be taken up by the next president, as there is no other way out if the government wants to maintain its commitment to a primary surplus target that guarantees a drop in the debt / GDP ratio. The Palocci proposal allows the government to continue increasing current expenses, in real terms, and to maintain the policy of recovering the minimum wage. Only at a less accelerated pace.

Ribamar Oliveira is a special reporter and writes on Thursdays