Ministry of Economy debates debt discipline proposal; understand

The Undersecretary for Public Debt, Otavio Ladeira, the Secretary of the National Treasury, Paulo Valle and the Undersecretary for Strategic Planning, David Athayde (Credit: Wilson Dias/Agência Brasil)

The internal debate in the economic team continues on the two proposals for fiscal discipline whose objective is to increase spending if the relationship between public debt and GDP stays well. The expectation is that a text will be published in November to discuss the ideas that will support a complementary bill to regulate part of the norms of Constitutional Amendment 109.

Treasury technicians defend the idea of ​​conditioning the expansion of spending to acceptable levels of the ratio between net debt and GDP. This plan considers expenditure, debt and primary result as benchmarks.

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The amount of expenditure would be corrected for the variation of inflation, but could have a real increase. When admitting that the primary result can be one of the references for the increase in expenditure, Treasury technicians have to face the criticism that there would be an indirect stimulus to the growth of collection and, in the limit, to the increase of the tax burden.

The part of the technicians’ proposal that uses the concept of net debt instead of gross debt as a reference for the expansion of expenditure was assessed as necessary to avoid the impact of the liquidity cushion on the ceiling.

According to what Treasury technicians propose, the average net debt of the general government (DLGG/GDP) of the previous year would be compared with those verified in the two previous years. In the most favorable scenario, with DLGG below 45%, spending could grow between 1% and 2% above inflation.

Between 45% and 55%, the real increase would be between 0.5% and 1%. For the worst case scenario, above 55%, real expenditure growth would be limited to 0.5%.

The Special Advisory for Economic Affairs of the Ministry of Economy has another proposal that uses as a reference the relationship between the gross debt of the general government (GGDB) and GDP. If it is less than 60% of GDP and real GDP grows above 1%, the ceiling could permanently increase, in real terms, in this variation of output growth, but with a reduction.

If real GDP growth is up to 1%, there is no increase in the ceiling. If there is a contraction in GDP, the ceiling could have temporary real growth.
In the GGDG scenarios between 60% and 80% of GDP, the real growth of the ceiling would depend on a real increase trigger of 2% of GDP. In the case of a recession, the rule remains the same. In the worst case scenario, with GGB above 80% of GDP, the real increase in the ceiling would only occur in recessions.

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