Against the "Mansueto plan," Guedes insists on a fixed amount to transfer to states during the pandemic.

Marcela Ayres, Reuters - The economic team wants to transfer resources directly to states and municipalities amid the coronavirus crisis, in exchange for freezing public sector salaries for two years, after assessing that the processing of the so-called Mansueto Plan ended up being contaminated by other demands, a senior source from the economic team told Reuters.

The economic team's idea is that the new transfer will serve as an additional boost to the R$88,2 billion package announced in March to strengthen subnational entities amid expectations of a sharp drop in revenue due to social isolation measures to contain the spread of the coronavirus.

"We give money to states and municipalities, but it can't be for salary increases," said the source, speaking on condition of anonymity.

"Everyone is facing the threat of unemployment, companies are closing, and in the public sector everyone is at home, with a full refrigerator and high salaries? Then don't give raises for two years," he added.

According to the source, the economic team does not want the transferred funds to be considered compensation for lost revenue from any taxes—ICMS, in the case of states, or ISS, in the case of municipalities—but rather to be considered extraordinary aid in the face of the pandemic.

With this, Minister Paulo Guedes' team wants to avoid future legal challenges claiming that the funds were insufficient to offset the drop in revenue.

Of the 32 billion reais, 16 billion reais would already be earmarked, the source stated, with 14 billion reais in transfers of resources from the National Health Fund to state and municipal funds. Another 2 billion reais would be used to double the resources already announced by the federal government for the Social Assistance Budget.

The way this new proposal will proceed is still being politically evaluated, after the substitute bill by Congressman Pedro Paulo to the so-called Mansueto Plan also proposed an expansion in the possibility of contracting debt, with which the Executive branch disagrees.

A technical note released by the Treasury on Saturday pointed out the existence in the substitute text of mechanisms that would provide relief to the States beyond the Covid-19 emergency, mainly benefiting the State of Rio de Janeiro by almost 27 billion reais.

Rio de Janeiro is the electoral base of both the rapporteur of the proposal, Deputy Pedro Paulo (DEM), and the president of the Chamber, Rodrigo Maia (DEM).

DISTORTED PLAN

Within the economic team, the view is that the Mansueto Plan, sent to Congress last year, has lost its main pillar: the establishment of fiscal adjustment counterparts by the states in order to gain Treasury guarantees for new credit operations. For this reason, it could not even be considered a "light version of the Mansueto Plan."

The source, speaking to Reuters, pointed out that there is an understanding that structural issues are taking a back seat at this time due to the urgent need to address the coronavirus.

But the source argued that the correct approach would be to inject resources "directly" into the states' budgets, rather than allowing new funding without stricter regulations for the federal government to assume responsibility for payments in case of default by the states.

Economic experts believe that the loosening of rules for Treasury guarantees on state loans up until 2014 was fundamental to the disarray of state government public finances in the following years.

On Saturday, Treasury Secretary Mansueto Almeida stated that it was important to determine a specific amount for the transfer of resources to states and municipalities, and that "something around 30 to 40 billion is manageable so as not to put too much pressure on the primary deficit."

"If it's something much higher than that, it starts to become a concern," he said.

According to the Treasury, the substitute bill could have an impact of 222 billion reais considering all its implications.

The agency's technical note highlighted that the proposal includes forgiveness regarding the sanction foreseen in a 2016 law, which opened the way for renegotiating state debts with the federal government. This would result in a loss of approximately 27 billion reais for the federal government in 2020.

To benefit from the debt extension, states were required to limit their primary spending in the two years following the renegotiation. At the end of last year, the Treasury identified that most states had failed to comply with the agreement, with the largest penalties foreseen for this year being payments of 11,7 billion reais by Rio de Janeiro and 8,1 billion reais by Rio Grande do Sul.

With the changes to the Mansueto Plan, "the penalty would be reduced to approximately 13 billion reais (in total) and would not need to be paid in full this year, as its value would be incorporated into the outstanding balance of the refinancing contract."

The Treasury also highlighted that the substitute for the Mansueto Plan provides for forgiveness of late payment charges on state debts in long-standing judicial disputes, representing a discount of another 16 billion reais, with 15,2 billion reais coming from Rio de Janeiro alone.

On Monday, President Rodrigo Maia stated that the Executive branch includes in its total calculations for the Mansueto Plan issues that are not addressed by the Chamber's proposal.

According to Maia, the estimated value is "far" from what has been released by the Ministry of Economy. The rapporteur of the proposal has argued that the total impact is 100,7 billion reais.