Meirelles defends the new public spending cap.

247 - Finance Minister Henrique Meirelles defended the approval of the new public spending cap by Congress. See his article below:

The new tax regime

By Henrique Meirelles

In a complex and justifiably anxious scenario, clarity and realism are essential when analyzing the strategy to pull the country out of what is likely to be the worst recession in our history. The crisis's main component is the serious fiscal imbalance, resulting from the continued increase in public spending for almost three decades, a trajectory that has been severely exacerbated by decisions made in recent years.

From 1997 to 2015, federal government spending grew, on average, 6% above inflation. From 2007 to 2015, it grew more than 50% above inflation.

Fiscal deterioration and heavy interventionism caused a sharp drop in confidence, leading to a collapse in investment and reducing economic activity and employment. The ensuing recession intensified the decline in tax revenue, which began in 2011.

Gross public debt is already approaching 70% of GDP, compared to an average of 45% in emerging countries. We risk an even more severe crisis that can only be avoided with structural changes in the dynamics of public finances. This requires amendments to the Constitution, since about 80% of government spending is constitutionally defined. Without these changes, there is no way to reverse the deteriorating trajectory.

The country is therefore facing a dramatic situation, which has caused an uncontrolled rise in debt and an increase in risk premiums, raising the structural interest rates of the economy. For this reason, we have presented a proposed constitutional amendment (PEC) that sets a ceiling on the increase in public spending, with zero real growth over time. We are also working on the pension reform project, which is essential for us to maintain balanced public accounts.

It is a lengthy process given the demand for immediate solutions, but a quick one for a structural change in the trajectory of rising spending resulting from the 1988 Constitution. With the approval of these measures, it will be the first time in decades that an administration will end with lower spending (as a percentage of GDP) than when it began.

One sign that we are heading in the right direction is the beginning of the reaction of economic agents to the proposed structural changes. The level of business and consumer confidence has increased, and there is already clear data showing a recovery in activity, such as industrial production figures for the second quarter.

Naturally, as in any democracy, the timeline for change depends on legislative deadlines and procedures. In this process, we are moving forward without setbacks. One of the great gains of this reform, in addition to budgetary realism, will be the discussion of budget priorities in light of the spending cap. Another important advance is the renegotiation of state debts, which establishes fiscal adjustment also with the adoption of a ceiling on the growth of expenses.

The changes proposed by the Legislature refer to adjustments in the Fiscal Responsibility Law. They are not changes to the counterpart required of the States, which remains fully maintained. The reforms, therefore, continue their course within the legislative debate, which does not harm, but rather legitimizes, the new fiscal regime.

We remain confident that the constitutional limit on federal spending will be approved by Congress as soon as possible. The result will be a lasting transformation in the trajectory of public finances, guaranteeing the realism and structural balance fundamental for Brazil to resume sustainable development and offer a better standard of living for all. This, after all, should always be the goal of all economic policy.