The Chamber of Deputies approves a constitutional amendment that delays the full inclusion of court-ordered debts in the fiscal target by ten years.

BRASILIA - The Chamber of Deputies approved in two rounds this Tuesday, the 15th, a proposed constitutional amendment (PEC) that allows the government to remove spending on court-ordered debts (judicial debts owed by the federal government) from the fiscal framework's spending limit starting next year. The measure also stipulates that these expenses will be re-incorporated into the fiscal target in 2027, at a rate of 10% per year - which could delay the full incorporation of these billion-dollar expenditures into the public accounts by ten years.

There were 404 votes in favor, 67 against, and three abstentions in the first round; in the second, 367 in favor and 97 against. The amendments were rejected, and the text returns to the Federal Senate.

The President of the Chamber, Hugo Motta (Republicanos-PB), said that he will ask the President of the Senate, Davi Alcolumbre (União-AP), to submit the PEC to a vote by senators this Wednesday, the 16th.

The initiative resolves uncertainty regarding the 2027 Budget, since a 2023 decision by the Federal Supreme Court (STF) stipulated that all payments should be included in the official accounting records in 2027 - currently, part is paid within the fiscal rules and part is outside.

Since this expense was estimated at around R$125 billion by the government, public accounting experts believed it would end up squeezing all other spending, making the public sector unviable. In other words, the government would need to find a solution.

The report on PEC 66, as it was numbered, was handed over to Congressman Baleia Rossi (MDB-SP), president of the party of the Minister of Planning and Budget, Simone Tebet, responsible for preparing the budget.

In addition to the slower pace of incorporation of federal court orders, the PEC also establishes a limit on the payment of court orders by municipalities and opens a new period for the installment of debts owed by municipalities to their own Social Security schemes and the General Social Security Scheme.

Expenditure on court-ordered debts will also be excluded from the fiscal framework's spending cap - this limit is adjusted annually to a limit of up to 2.5% per year above inflation - starting in 2026. They will no longer be included in the spending cap.

Fiscal space

With this removal, the Constitutional Amendment Proposal (PEC) stipulates that the ceiling's calculation base will be recalculated, taking into account the value without court-ordered payments in 2025 and adjusting it only after that. This, in itself, will not create room for new government spending in 2026, according to Felipe Salto , chief economist at Warren Investimentos.

"In principle, such changes do not imply an increase in fiscal space compared to the current situation established by the Supreme Federal Court in 2023. Currently, court-ordered debts exceeding the sub-ceiling are excluded from the New Fiscal Framework's spending limit. With the proposed change, all court-ordered debts will be subtracted, but the spending limit will be reduced by the sub-ceiling amount," he wrote in a report distributed to clients.

But, in another chapter, the Lula administration secured a bonus in its proposal to spend more in the middle of an election year. Baleia Rossi included a provision that allows the government to incorporate into the 2026 spending cap the additional R$12.4 billion resulting from the recalculation of the inflation projection used in the rule that sets the spending limit.

Tiago Sbardelotto, a public accounts specialist at XP Investimentos, states that the PEC "anticipates the solution to a problem that would arise in 2027 with the reinclusion of court-ordered debts within the expenditure limit and the primary result target, which would lead to a collapse of both rules," but says he sees problems that delay the adjustment of public accounts.

"First, ( the PEC ) allows for the inclusion of R$12.4 billion in additional credits related to the difference in inflation between the end and the middle of last year in the spending limit base, something that was not foreseen in the original rule and that could generate additional room for the coming years," he said. "Second, the incorporation of 10% per year of the value of court-ordered debts into the calculation of the target seems excessively gradual to us. A faster change would be better so that the target more accurately reflects the fiscal effort."

The opinion presented by Baleia Rossi was negotiated with the government and replaces the rapporteur's original proposal, which called for classifying the principal of court-ordered debts and Small Value Requisitions (RPVs) as a primary expense, and interest and corrections as financial expenses. The internal assessment was that this measure could open up billions in fiscal space, but would compromise transparency.

The government also managed to force through its opinion a reduction in the ceiling for classifying payments as RPVs, which fell from 60 to 40 minimum wages. This change increases the amount to be paid via court-ordered debts and reduces the amount allocated to RPVs. According to economic team experts, this provides temporary relief for public finances, as the RPV payment term is 60 days.

According to economist Marcos Mendes , given the government's inability to promote fiscal adjustment, the solution adopted for court orders in the PEC represents a less harmful alternative than the accounting maneuver of classifying them as a financial expense.

This is because, according to the economist, it avoids distortions in the accounting records of these payments and offers a gradual solution to the issue of court-ordered debts, gradually incorporating them into the official balance sheet and forcing the government to adjust as the funds return to the account. "And there is no opportunistic move to increase the ceiling under the pretext of resolving the court-ordered debt issue," he added.

The opinion also includes a change that brings forward the deadline for the Judiciary to submit to the Executive the total amount of debts arising from court-ordered debts, allowing the federal government to have this information before sending the Budget Guidelines Bill to the Legislature.

According to Mendes, this measure improves planning by allowing greater precision regarding the amount to be paid in court-ordered debts. There will be a small benefit for those entering the system in 2027, as the court-ordered debts for that year will only cover the period from April 2025 to January 2026, meaning less than a year of accumulated debt. However, this effect will be adjusted starting in 2028, he said.

See the main points of the text

• Exclusion of court orders from the framework ceiling: The text provides, starting in 2026, the exclusion of Union expenses with court orders and small-value requisitions (RPVs) from the fiscal framework expenditure limit.
• Transition rule for the inclusion of court orders in the target: Establishes that, starting in 2027, the federal government's annual expenses with court orders and RPVs will be incorporated "gradually" into the calculation of the fiscal target established in the Budget Guidelines Law (LDO), cumulatively each fiscal year, in at least 10% of the expected amount of these expenses - which would total ten years of total incorporation
• Debt Repayment: Municipalities will be able to pay their debts to the Federal Government, including those incurred by their autonomous agencies and foundations, in up to 360 successive monthly installments, compared to the current 60 monthly installments. Exceptionally, social security debts may be paid in 300 installments, instead of the current 240 installments.
• New limits for court-ordered debts: Payments of court-ordered debts by states, municipalities, and the District will have new limits: 1% of net current revenue (RCL) for municipalities with a backlog of court-ordered debts of up to 15%; 1.5% of the RCL for backlogs between 15% and 25%; 2% of the RCL for backlogs between 25% and 35%; 2.5% of the RCL for backlogs between 35% and 45%; 3% of the RCL between 45% and 55%; 3.5% of the RCL for backlogs between 55% and 65%; 4% of the RCL for backlogs between 65% and 75%; 4.5% of the RCL for backlogs between 75% and 85%; and 5% for backlogs exceeding 85%.
• Propag for municipalities: The opinion applies to municipalities all provisions on the installment payment of state debts under the State Debt Full Payment Program (Propag)
• New calculation basis for monetary restatement and interest: The rapporteur established the Broad National Consumer Price Index (IPCA) as the parameter for calculating monetary restatement and interest for federal court-ordered debts and social security debts of states, municipalities, and the Federal District.

PEC is sponsored by municipalities, says Haddad

Finance Minister Fernando Haddad stated that the PEC is "sponsored by the municipalities."

"It was presented by the National Confederation of Municipalities. They had municipal issues and decided to address the issue of federal court orders also due to the fiscal framework and the end of the waver that had been given by the Federal Supreme Court," the minister told the press.

"They are finding a way so that the next government does not have to face the problems that our government had to face with Bolsonaro's default."

Haddad also said he hadn't had a chance to read the final draft. When asked about economists' assessment that the PEC's current wording opens up R$12 billion in funding next year, he responded that he was unaware of the calculation in the text.

"I'll look into that exactly. Our concern was the issue of court-ordered debts," the minister stated. "We didn't want to leave here without addressing this issue this year, precisely to provide peace of mind for the country and to have a rule in place where creditors receive payment and a clear fiscal rule on this issue."/ Contributed by Flávia Said