The so-called State Debt Repayment Program (Propag) was actually designed as the most flexible system for negotiating state debts, which was contracted in the 1990s and which has already been the subject of several agreements. Moreover, it has incentives for all states — including those with recent bills — to increase their spending.
The backbone of the new program provides for a reduction in real interest payments from debtor governments while redirecting this amount to expenditures in the countries themselves and allowing part of the outstanding balance to be used for investments – in other words, more expenditures.
But the program also provides a mechanism to create a certain balance between federal entities, that is, preventing only some from benefiting. Propage stipulates that the most indebted countries (which would naturally benefit more) put resources into a new fund, created with the programme. These funds will be distributed specifically to federal units with low debt, as a compensation mechanism.
As a result, those who pay their bills will also have more resources – and spend more. Congress’s veto override also makes it practically possible for all countries, especially the most indebted countries, to join the program. In other words, the more highly indebted countries join PROPAG, the more resources are available to all governments, whether they are in the red or not.
On another front, Probag predicts that in order to pay less interest and spend more, the state will hand over assets to the union in return – which will also be deducted from the debt balance. Some entities, such as Rio de Janeiro, have been shown to have few or difficult to measure assets.
To solve this problem, Congress agreed, and Lula vetoed, allowing conservatives to use the fund created by tax reform as an asset to compensate for the expiration of some tax incentives. Now the parliamentarians have overturned the presidential decision and the oath has returned to force.
This has made it easier for governors from different states to join the programme, which will take effect in 2026, on the eve of elections.
Data released by the central bank on Friday show that states and municipalities have accumulated a surplus of R$24 billion this year. With the incentives created by Propag, the trend now is for these numbers to reverse from next year onwards.