Decision allows government to pay without breaking spending cap; Ministry of Finance plans to pay up to R$95bn

12/01/2023


André Mendonça — Foto: Gustavo Moreno/SCO-STF

André Mendonça — Foto: Gustavo Moreno/SCO-STF

The Federal Supreme Court authorized the government to pay IOUs issued by the judiciary branch regarding federal debts via extraordinary credit, keeping them outside the fiscal rules. The decision was taken by 9 votes in favor of the Ministry of Finance’s thesis, including that of rapporteur, Justice Luiz Fux. Justice André Mendonça was the only vote against.

He submitted the process for review on Wednesday and, on Thursday, he voted against the thesis defended by the government, that the annual cap for court-ordered payment is unconstitutional. Mr. Mendonça was the Federal Attorney General (AGU) of the Bolsonaro administration, when the cap for these court-ordered payments was proposed, in 2021. The proposal to amend the Constitution (PEC) was approved by the Congress, and the cap came into force in 2022.

Despite Mr. Mendonça’s vote, the majority of justices followed the rapporteur, Luiz Fux, who accepted in part the Executive branch’s request. He voted for holding the cap for the payment unconstitutional and agreed to allow the government to pay off the stock—estimated by the Ministry of Finance between R$90 billion and R$95 billion—via extraordinary credit (outside the spending cap) and with no impact on the primary result target.

Any amount that exceeds the annual sub-limit until 2026 may also be paid via extraordinary credit, without entering into the spending cap under the new fiscal framework. The year 2026 will be the last one, since it is the deadline for the sub-limit to be effective.

The rapporteur did not accept the government’s request to classify the costs of these judgments as financial expenses, which could keep them outside the caps of the new fiscal framework and the primary result target for an unspecified time. This was one of the points receiving criticism. According to Mr. Fux, such discussion is not up to the STF.

As the National Treasury explained to Valor, before opening the provisional presidential decree for payment, it needs to wait until the appellate decision is published, and finalize the calculation of the liabilities amount to then support the request for extraordinary credit, since the amount of some R$90 billion to R$95 billion is an estimate. This calculation of liabilities is being carried out jointly with the Federal Justice Council (CJF).

The economic team expects stock regularization can be made this year, in spite of the required steps. “For the economic team, this decision [by the STF] is extremely important. The idea is to start 2024 without this liability,” the deputy secretary of the National Treasury, Viviane Varga, said on Wednesday.

The Treasury also explained that this judgment did not change the current rule for the payment of the IOUs related to the National Fund for the Development of Basic Education (Fundef), which will continue as per the amendment 114/2021 schedule.

Former minister Maílson da Nóbrega, a partner at Tendências Consultoria, says the Supreme Court has moved towards an appropriate decision. In his view, the proposal to amend the Constitution limiting the payment “made the mistake of considering court-ordered payments as second-tier debts, which could face default. A court-ordered payment is as important to the borrower as a government bond,” he said.

He says the PEC could create a “snowball” effect of unpaid IOUs that would have to be paid off all at once in 2027, “a time bomb,” with the potential to cause severe damage to the government accounts at the beginning of a term. The government had expected that the stock would reach R$200 billion in 2027, making that year’s budget unfeasible if nothing was done.

Mr. Nóbrega notes that the Supreme Court was correct in its decision not to consider the merits of classifying part of the court-ordered payments as financial expenses, since the methodology recommended by the International Monetary Fund (IMF) and adopted by the Brazilian Central Bank considers financial charges as primary expenses, making interest rates on these payments primary rates.

Members of the economic team also see Mr. Fux’s vote as positive, because it solves the problem of the stock that exceed fiscal rules. The only thesis that was not accepted was actually seen as the most difficult request, as the Ministry of Planning and Budget did not agree with the classification as a financial expense, as Valor reported.

Por Jéssica Sant’Ana, Isadora Peron — Brasília

Source: Valor International

https://valorinternational.globo.com/