Idea is part of the menu of proposals under study to achieve zero deficit in 2025 by cutting expenses

06/18/2024

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Simone Tebet and Fernando Haddad — Foto: Cristiano Mariz/Agência O Globo

In the “comprehensive, general, and unrestricted” review of federal expenditures that it plans to undertake, the economic team is considering an old instrument designed to remove indexation from government revenues, known by the acronym DRU, as a way to alleviate the pressure of the growth of mandatory expenses on the budget, Valor has learned.

Created in 1994 as the “Emergency Social Fund,” the DRU allowed the federal government to reallocate up to 20% of revenues earmarked for healthcare, education, and social security to other areas.

The DRU is in effect until the end of this year, thanks to the so-called Transition PEC (proposal to amend the Constitution). However, it is very different from its original version, which served to make the budget more flexible for over a decade. Over time, the mechanism was watered down and no longer applies to revenues earmarked for social security and education, for example.

Now, the idea of something like the old DRU returns to the table as part of the wide range of proposals under study by economic sector experts to achieve zero deficit in 2025 and promote structural adjustment in the budget on the expenditure side.

These debates have been focused on modernizing indexation rather than removing them, as established by the DRU. However, the experts want to keep all proposals on the table to be filtered through political considerations. The debate is expected to continue over the coming weeks until the Annual Budget Bill (PLOA) for 2025 is finalized on August 31.

A preliminary discussion on the need to act on the expenditure side brought together President Lula and ministers Fernando Haddad (Finance), Simone Tebet (Planning), Rui Costa (Chief of Staff), and Esther Dweck (Management)—the members of the Budget Execution Board—on Monday.

“I felt the president much more in command of the numbers,” Mr. Haddad told reporters after the meeting. “An important space for discussion has opened.” As the economic team discusses reducing expenses, Ms. Tebet said that the ministers will present “solutions” to the president at a forthcoming meeting, without specifying which ones.

The importance of reviewing social program registries was also discussed, as eliminating irregularities is a way to create budget space.

The minister also highlighted the conclusions of the report by the public spending watchdog TCU presented last week. The document noted no increase in the tax burden in 2023. On the other hand, revenue waivers remained high: R$519 billion.

“The increase in the Social Security deficit is related to the increase in tax expenditure waivers,” said Ms. Tebet. The president, she said, was “extremely impacted” by the increase in federal subsidies, which total almost 6% of the GDP.

“The current situation is the chronicle of a death foretold,” said Marcus Pestana, executive director of the Independent Fiscal Institution IFI (a Senate-affiliated fiscal policy watchdog). According to him, the budget is heading towards a “full stranglehold” and a “shutdown,” after the government resumed the old rules of spending floors for health and education and the policy of increasing the minimum wage.

However, Mr. Pestana said the DRU is “an idea out of its time” and would only serve to “sugar-coat.” the problem. According to him, the measures indicated by Mr. Haddad and Ms. Tebet to tackle indexation are more consistent with the fiscal framework.

Bráulio Borges, an economist at LCA Consultores and researcher at FGV Ibre, advocated for a “supercharged DRU,” expanding its scope or the percentage of removal of indexation, as one of the measures that could create flexibility in the short term and improve budget rigidity already for 2025.

Among the currently indexed expenses that could be relieved via changes to the DRU, he said, are the constitutional floors for health, education, and the Fundeb (Fund for Maintenance and Development of Elementary Education). There is also the Federal District Constitutional Fund, in addition to congressional earmarks. “Obviously, it will be politically difficult to touch congressional earmarks and the Federal District Constitutional Fund. So, basically, the minimums for health, education, and perhaps Fundeb remain,” he said.

The discussion of the DRU, he said, could also be applied to the federal government’s revenue resulting from oil exploration under the production-sharing regime in the pre-salt, which has become more significant since 2018. This is a revenue stream that is estimated to reach nearly 1% of GDP by the end of the decade. “It would be interesting to remove indexation from oil profit in a new DRU to create more flexibility, not only from an expenditure management perspective but also to improve the primary surplus.”

It is important to note, Mr. Borges said, that, except for the profit from oil, other measures related to earmarked expenses help avoid increasing compression of discretionary expenses until 2026 and 2027, in a scenario that brings the risk of a shutdown.

“These are measures that create greater flexibility within the budget and extend the lifespan of the fiscal framework, which is not a perfect rule but provides some horizon of predictability for expenses. Alone, however, they do not generate the primary surplus that is needed. To really contribute to improving the primary result, it would be necessary to change the parameters of the fiscal framework. Expenses could no longer grow by 2.5% in real terms annually or 70% of revenue. A lower limit is needed, perhaps 1.5% or 2% for expense growth.”

(Renan Truffi, Guilherme Pimenta, and Gabriela Pereira contributed reporting from Brasília.)

*Por Lu Aiko Otta, Marta Watanabe — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/