An adjustment to correct imbalances in public accounts can be both robust and avoid undermining programs that make Brazil’s budget more progressive, says economist Sergio Firpo, coordinator of Insper’s Public Spending Quality Observatory. On Tuesday (10), he is releasing a study containing 30 proposals that, taken together, would free up R$353 billion a year for the federal government, equivalent to 2.78% of GDP, once the measures have reached full implementation, after approximately 10 years.

The package proposed by the economist includes measures such as a comprehensive review of tax expenditures (R$40.5 billion), limiting congressional budget amendments to 0.25% of primary expenditure (R$39.8 billion), raising the minimum retirement age for women, rural workers, and survivors’ pension beneficiaries (R$101.6 billion), and eliminating personal income tax deductions for healthcare, education, and dependents (R$38.3 billion).

“If you are concerned only about fiscal issues, some of these measures are effective, such as reducing the size of Bolsa Família to pre-pandemic levels. But that does not necessarily improve people’s lives or the efficiency of public spending. Some of them, if implemented, would actually worsen spending quality,” explains Firpo, who served as secretary for Monitoring and Evaluation of Public Policies at the Ministry of Planning and Budget (MPO) from 2023 to 2025.

“Obviously, how much of this comes to fruition is a political question. My analysis focused on allocating public resources from the perspective of those who need them most,” he says. The study, available on the observatory’s website, approaches fiscal adjustment over a 10-year horizon, with savings increasing over time and thereby softening the impact of many of the measures listed.

The proposals are divided into seven thematic areas: fiscal rules, accounting for savings equivalent to 0.45% of GDP after excluding potential overlaps with other measures, revenue-sharing arrangements with states and municipalities, and other deductions; social security (0.97%); labor and social assistance (0.45%); public-sector personnel (0.26%); education, healthcare, and housing (0.19%); tax expenditures (0.63%); and subsidies (0.03%). From this total, Firpo deducts 0.2 percentage point, as a conservative measure, to account for the reversal of the increase in the Tax on Financial Transactions (IOF) and the return of oil revenues to the minimum funding level for healthcare.

There are also two subsidies that do not affect the primary balance (which excludes interest expenses) but do have a financial impact: eliminating subsidized credit provided by the Brazilian Development Bank (BNDES), the Funding Authority for Studies and Projects (Finep), and the Constitutional Financing Funds (FCF), as well as ending the implicit subsidy embedded in the Student Financing Fund (Fies). These measures would improve the nominal balance by 0.25 percentage point of GDP.

Of the estimated gross savings generated by the selected package, 35.4% would come from measures affecting the top of Brazil’s income distribution or those earning above the median. In addition to the measures already mentioned, these include proposals such as ending the personal income tax exemption on retirement benefits and pensions received by people with serious illnesses (R$10.2 billion), limiting interest on equity payments (R$10 billion), and enforcing the public-sector salary cap while eliminating excessive compensation (R$10.2 billion).

By contrast, 13.9% of the savings would come from measures affecting middle- and lower-income groups, including a series of reviews and tighter eligibility rules for social programs, such as reassessments for disability benefits (R$9.9 billion), the Continuous Cash Benefit (BPC) for people with disabilities (R$15.2 billion), and the closed-season fishing benefit (R$2 billion).

The 30 measures included in Firpo’s package were selected from a pool of 44 proposals that have circulated over the past two years, originating from the government itself, academia, research centers, and the financial market. Some were also developed by Firpo. Taken together, the original proposals would generate R$910.1 billion in savings, or 7.17% of GDP.

The innovation lies in the way he narrowed down the selection, applying an analytical criterion that prioritizes cuts to underperforming policies while preserving those with better evaluations. Broadly speaking, the exercise assigns each measure a score from zero to 10 based on five criteria: effectiveness, efficiency, overlap with other policies, distributional effects, and sustainability. The proposals are also classified according to the strength of the available evaluation evidence for each policy. Measures scoring below the group average are then discarded.

Of the 38 proposals that passed this screening process, six were ultimately excluded because their effects depend heavily on the final design adopted by policymakers or because they are mutually exclusive. Eliminating the wage bonus, for example, would generate R$22.3 billion in savings and was selected over proposals to merge the benefit with other programs.

Two other proposals do not generate spending savings. This category includes reducing the ceiling for real growth (above inflation) in expenditures under Brazil’s fiscal framework from 2.5% to 1.5%, a measure currently under consideration by President Luiz Inácio Lula da Silva’s economic team.

In Firpo’s calculations, this is because of a key assumption adopted in the simulations: revenue grows by 2% a year in real terms. Since current rules allow spending to grow by 70% of primary revenue growth, the resulting increase would be 1.4%, still below the proposed new ceiling.

Although it would not generate savings under the assumptions adopted, the change would have two positive effects, the economist says. First, it would prevent years of stronger revenue growth from translating into permanent spending increases. For example, revenue growth of 3.6% in a given year would allow spending to increase by just 1.5%, rather than the current 2.5%.

Second, it would reduce the potential fiscal space available for new spending. “One concern behind the adjustment is precisely to prevent the fiscal space created from being filled by other expenditures. For example, if funds are left over from congressional amendments but are then used for other spending, the adjustment is undermined,” he explains. “By lowering the ceiling, the available fiscal space also becomes smaller.”ç.;;;

The economist favors even lower ceilings for real spending growth, provided they do not affect priority expenditures. “And there is no point in lowering that ceiling if mandatory spending continues to grow unchecked. That would only squeeze discretionary spending,” he adds.

The six measures whose impact depends heavily on the final political design include issues such as restoring payroll taxes, changing the constitutionally mandated minimum level of healthcare spending, and revising the minimum wage adjustment rule.

Although the final package does not include a specific rule for the minimum wage, the economist outlines possible scenarios based on assumptions currently being discussed publicly. If the existing rule remains in place—with real increases limited to the fiscal framework’s 2.5% ceiling—the package would continue to generate savings equivalent to 2.78% of GDP. If the ceiling for real spending growth were lowered to 1.5%, savings would rise to 2.92% of GDP. If real minimum wage increases were capped at 1%, as economist Manoel Pires advocates, savings would reach 3.11%. And if the policy were limited to inflation adjustments alone, they would climb to 3.49%.

Regarding the proposal to decouple retirement benefits from the minimum wage, there is debate over whether the measure would violate one of the Constitution’s entrenched clauses, which cannot be abolished through constitutional amendments. Some analysts believe it may be possible to circumvent this restriction. Firpo adopts the opposing interpretation in his proposal and therefore leaves the measure out. “Ideally, there should be different minimum benefit levels for the labor market, social security, and social assistance. But the Constitution links everything to the minimum wage. So there is no point in considering that,” he says.

Brazil’s demographic trends underpin the decision to freeze education spending in real terms, but not healthcare spending. In the case of education, the country’s declining birth rate justifies the choice. At the same time, Firpo notes that federal spending in the sector is partially protected by the expansion of Fundeb, Brazil’s basic education funding fund.

“Higher education is the sector that would be adversely affected. But part of that impact could be offset by charging tuition for undergraduate students whose household per capita income exceeds two minimum wages,” he argues.

According to the World Bank, 65% of students at federal universities belonged to the wealthiest 40% of the population in 2017. Meanwhile, tuition fees charged under the proposed model would preserve free access for approximately three-quarters of students in public higher education, according to Firpo’s own calculations.

In healthcare, demographic trends point in the opposite direction, with an aging population. Another factor is that healthcare spending is rising worldwide because of technological advances. Firpo therefore argues that spending should be allowed to continue growing, but under a revised rule.

“I support decoupling it from Net Current Revenue [RCL]. We could consider something like the Extended National Consumer Price Index [IPCA] plus some additional percentage increase. After all, under the current system, spending is procyclical: during recessions, perhaps precisely when the sector is most needed, fewer resources are available,” he explains.

In addition to listing the measures, Firpo’s study outlines the legislative path required for each proposal and estimates how much they could save if constitutional amendments and lower-level regulations took effect in 2027, while ordinary and complementary laws were approved in 2028. By 2029, two years after implementation began, the package would generate savings equivalent to 0.72 percentage point of primary spending. Five years after implementation began, in 2032, that figure would reach 1.79 percentage points. By the tenth year, in 2037, it would amount to 2.74 percentage points, close to the package’s maximum projected impact.

He also calculates the cost of delays. If approval of the measures were postponed by one year, primary balance savings in 2029 would fall to 0.16 percentage point of GDP and reach 1.60 percentage points in 2032. With a two-year delay, the savings would amount to 0.05 percentage point and 1.41 percentage points of GDP, respectively.

“The problem is that the longer fiscal adjustment is delayed, the more emergency measures are needed. More spending freezes, budget contingencies, phased implementation, and last-minute cash-flow savings. It means a supplier you decide not to hire, a construction project that is never completed… And that also affects the quality of public policy,” Firpo says.

“That is my biggest concern. Fiscal adjustment cannot simply be ignored. The longer it is postponed, the higher interest rates rise, the worse household debt becomes, and the greater the pressure to adjust. But making it under pressure is a recipe for lower quality. So it is better to have a plan and avoid significantly affecting the public services and policies being provided,” he adds.

*By Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/