The risks to the PEC public accounts that boost social spending in an election year

Experts heard by BBC News Brasil warn that increased spending can lead to higher interest rates and inflation.

The Senate approved this Thursday (30) the PEC (proposed amendment to the Constitution) that opens a gap for the government of President Jair Bolsonaro (PL) to pierce the spending ceiling and boost social programs just over three months before the elections. . The PEC now goes to the Chamber of Deputies.

If approved by the deputies, its impact on public coffers could reach R$ 41.2 billion.

Nicknamed “PEC Kamikaze”, it proposes the recognition of the state of emergency, which, in theory, would provide legal support for the government to create benefits in an election year. The Electoral Law prohibits this practice as a measure to avoid unequal competition between candidates. On the other hand, the legislation also provides that in emergency situations, the creation of benefits or increased expenditures would be allowed.

In the justification presented by the PEC rapporteur, Senator Fernando Bezerra (MDB-PE), the emergency situation would be justified by the increase in fuel prices and inflation.

The government defends the measure saying that it is important to reduce the impact of high inflation on the most vulnerable people. The PEC plans to create benefits for self-employed truck drivers of R$ 1,000 per month until December this year (the “truck voucher”), an aid for taxi drivers, increases the Auxílio-Brasil from R$ 400 to R$ 600 (zeroing the queue for the benefit), doubles the value of Auxílio Gás, compensates States for free public transport for the elderly, provides subsidies for the production of ethanol through tax credits, among other measures.

The proposal, however, is being discussed as Bolsonaro appears in second place in the most recent polls, behind former president Luiz Inácio Lula da Silva (PT). In addition, according to a survey by the Datafolha Institute released in March this year, 68% of respondents attribute the responsibility for the rise in fuel prices to him.

Economists interviewed by BBC News Brasil, however, warn that government-backed PEC could have negative effects on the economy in the short, medium and long term. Among them are: increased public spending, market distrust of fiscal policy; pressure on the interest rate; rising inflation; and fiscal difficulties for whoever takes office in 2023.

Increase in public expenditure

The increase in public expenditure is the most immediate risk identified by economists interviewed by BBC News Brasil. According to them, the BRL 41.2 billion above the spending ceiling significantly compromises the country’s fiscal policy.

“Adding the R$ 42 billion of this PEC with the impact of R$ 100 billion of the project that changed the ICMS (tax on the circulation of goods and services), we have an action of around R$ 150 billion. And that account tends to grow even more. Perhaps we are the country that is spending the most in the world to face the fuel crisis, but the quality of spending is lacking”, says Leo Cézar, economist, consultant to the Senate and one of the creators of the Independent Fiscal Institute (IFI).

For the chief economist of stock manager Ryo-Asset and former director of the IFI, Gabriel Barros, the initial cost of the PEC estimated at R$ 41.2 billion could be even higher because the recognition of the state of emergency creates a legal loophole. so that the government can make more unforeseen spending.

“This state of emergency opens up the possibility for the government to further expand the expenditures provided for in the PEC. And they are expenses of difficult social control. In other words, we will only know the total amount spent by the government when the Federal Audit Court (TCU) analyzes the management of federal public accounts”, he explains.

market distrust

The second risk pointed out by economists is the increased distrust of the market in relation to the country’s fiscal policy. They argue that, in recent months, this confidence had already been eroded by another PEC, the precatories, approved last year and which opened up extra space in the government budget that could reach R$104 billion. To a large extent, the PEC made it possible to pay the Auxílio-Brasil of R$400 on an emergency basis.

For Gabriel Barros, the proximity between the two PECs diminishes the market’s confidence in the government.

“We are amending the Constitution every six months. This creates additional uncertainty in a year that is already sensitive due to the elections and the market begins to look at Brazil with less certainty about how public accounts will be managed,” he says.

Source: BBC News Brazil