Lula government projects the need to review R$53.7 billion in mandatory spending by 2030

The Luiz Inácio Lula da Silva (PT) government highlights the need to review at least R$53.7 billion in mandatory spending by 2030 to ensure the continuity of other existing public policies at the same current level, according to projections included in the PLOA (annual budget law project) of 2027.

The value could rise to R$63.6 billion when considering the additional space required to meet the Health floor in the years 2028 and 2029.

The estimates portray the difference between the agencies' expected expenses to maintain public policies and the space effectively available for discretionary actions by the Executive Branch within the limit of the fiscal framework, a rule that regulates federal expenses.

The document, however, does not detail what measures would be adopted to achieve the estimated results. If they do not materialize, the number serves as a warning of the size of the cut that the Executive must make in discretionary (non-mandatory) actions to continue complying with the rules.

The information was included in the so-called Medium-Term Budget, which aims to point out the spending trend for the three years following the PLOA reference and identify, in advance, possible bottlenecks that will demand the attention of managers.

To Folha, Minister Bruno Moretti (Planning and Budget) makes the reservation that the instrument has methodological limitations and will need to be improved. According to him, although the government is aware that it needs to review mandatory spending, this will not necessarily be the amount required in the future.

"The conclusion of the need for review is correct, but the methodological limits of this instrument being used as a projection are great", he states. According to Moretti, who took office on March 31 of this year, the calculation is based on aggregate expenditure values, without evaluating the effect of measures already adopted on specific expenditure items.

"The approved measures affect policies, actions, specific programs, so you can't capture this through such an aggregate approach. You really need to go into each of these expenses. And that's not the methodology, especially because this methodology has a standard", he says.

"I signed this PLOA, it is not a criticism of it. It is a statement that it [the calculation] really does not serve as a projection as it does not absorb the already approved review measures", states the minister. "The instrument is limited and needs to be improved."

The medium-term Budget was a change introduced by Simone Tebet's team when she was in charge of Planning. The discussion began in 2023 and implemented based on the 2024 budget proposal.

Since then, the Executive had already presented aggregate projections of revenues and expenses for a four-year horizon, but this is the first time that technicians have included the so-called "expenditure baseline". This is an estimate of how much it costs to maintain the policies that already exist, without expansion or new initiatives.

"The distance between the baseline and the available space points to the need to review spending in the coming years — a contained and stable effort, to be conducted in the budget cycle itself through the reevaluation of programs and allocative reprioritization", says an excerpt from the 2027 PLOA.

In this first year, agencies were able to freely indicate the cost of continuing policies, without any explicit limit. Projections are indicative and do not generate any type of obligation for subsequent budgets.

For 2027, these costs have already been made compatible with the fiscal framework limit and the primary result target (difference between revenue and expenses, with the exception of debt service).

In 2028, the government calculated the need to reduce mandatory spending by R$15.8 billion through expenditure review actions. This is because the cost calculated by the bodies reached R$224.2 billion, against a space of R$208.4 billion available for discretionary actions.

Furthermore, the Executive noted a need to accommodate another R$7.7 billion in 2028, since the "baseline" of health expenses was below the minimum estimated for the area — equivalent to 15% of net current revenue (sum of revenue collected by the Union in the last 12 months, minus the deductions provided for in the Fiscal Responsibility Law) for the year.

In practice, the gains from the review would need to reach R$23.5 billion to accommodate policies that already exist without imposing cuts.

In 2029, the need for review was estimated at R$14.9 billion, since the space of R$211.3 billion for discretionary spending would be insufficient to cover the costs of the programs, calculated at R$226.2 billion.

The government would still need to find another R$2.2 billion to ensure compliance with the health minimum, so the total review would need to reach R$17.1 billion.

In 2030, the economic team estimated a cost of R$233.9 billion to finance the policies, compared to a space of R$210.9 billion. This means a need for review of R$23 billion. In this case, there would be no additional demand to meet the health minimum.

Technicians state that spending review measures with continuous effects can help to make room in the Budget in more than one year. For example, if a change results in savings of R$2 billion per year, at least R$6 billion would be guaranteed within the horizon analyzed by the government.

The government also highlighted that the calculations were made under "a scenario that already reflects greater control of mandatory expenses, whose growth converges to the [percentage of expansion] of the limit [of the framework]". In other words, if there is a change in the dynamics of these expenses, the need for review may also grow over the years.

PLOA 2027 was presented last Monday (31) by the Executive. The proposal foresees a surplus of R$18.6 billion, within the range anticipated by Folha of R$18 billion to R$20 billion.

Amid the electoral campaign, the review of mandatory spending became one of the central themes in the economic debate, given experts' concern about the trajectory of public debt.