Increased public debt, high interest rates, and above-normal inflation are the consequences of a lack of financial oversight. Moreover, it creates a state of distrust in public accounts among citizens, businesses and investors. For example, when there is a deficit (it spent more than it collected), the government needs to take on debt by issuing bonds.
Spending caps are a means of controlling public accounts and freezing expenditures, even if they are not always met. The scenario is that debt has increased in recent years. Between 2014 and 2021, Brazil ran a deficit. In 2022, it had a surplus of R$54 billion, and in 2023, a deficit of R$230 billion.
Changes in tax policy
In 2023, the new fiscal rule was put in place – which limits spending growth to 70% of revenue variance over the previous 12 months. Now, the expense limit is more flexible than the spending cap.
There is a range, which is seen as a floor and ceiling for real growth in government spendingEven if the economy is growing, spending cannot grow more than 2.5% per year above the rate of inflation. If it is a time of economic contraction, spending cannot grow less than 0.6% per year above the rate of inflation. Fundeb (basic education fund) and health (nursing homes) are outside these limits because they have specific rules.
Punishment mechanisms limit spending in the event of non-compliance with the ruling. If the initial result is less than that, spending growth for the following year will decrease from 70% to 50%, starting in 2025. For this year, the marginal ceiling will be limited to 2.5% of real spending growth.
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