See how the aid program for state governments turned out after Lula’s veto was overturned

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The Propag sets a 30-year period for state debt restructuring and three payment methods: IPCA plus zero interest, plus 1% or plus 2%, depending on conditions such as the percentage of debt advance, contribution to the federal equalization fund and assets transferred by the state to the federal government.

The states won with the direct participation of Rio’s governor, Claudio Castro (PL-RJ), who went to Brasilia to follow the vote. He had been involved since the beginning of the week in the talks that took place in Congress, and yesterday morning he participated in the decisive meeting that concluded the political agreement on this issue.

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The agreement was reached at a meeting at the official headquarters of the Senate, in the presence of Davi Alcombre, Zee Guimarães, Carlos Zaratini, Randolph Rodriguez, Flavio Bolsonaro, and Castro himself. The meeting was also attended by MP Ze Victor (PL-MG), Rapporteur of the Provisional Procedure (MP) for Environmental Licensing, as part of the negotiations on determining the procedures for the Environmental Veto, in parallel with the Propag discussion.

On Wednesday, Castro met with European Union Prosecutor Jorge Messias with the aim of ensuring that the consensus was not judicialised.

There is no incentive to change

One of the points that Lula objected to and that came back into force was the article that allowed states to use money from the New Regional Development Fund (FNDR), created with the tax reform, to reduce part of the debt owed by the Union.

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Removing this point was essential for Rio de Janeiro, as the country has few assets that it can hand over to the federal government in exchange for reducing its debt. Exchanging assets to reduce debt was an important part of the Propag process.

The FNDR will be resourced by the Union from 2029 onwards. The amounts start at R$8 billion per year and will reach R$60 billion per year in 2043.

In addition to Rio, São Paulo has already shown interest in obtaining resources from the National Fund for National Development in order to reduce its debt owed to the European Union. Sao Paulo’s Finance Minister, Samuel Kinoshita, was also in Brasilia yesterday to discuss the propaganda.

When the São Paulo government was asked, through an adviser, whether it should join the programme, it responded that it would “analyze the scenario, evaluate its impacts and any necessary adjustments for decision-making purposes.”

Abolishing the veto again by Congress would allow the states to reduce debt expenditures incurred when carrying out business under the responsibility of the Union. In a statement, Warren Investimentos chief economist Felipe Salto estimated that this could have an impact on public debt.

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Salto explained, “Logically, it is difficult to establish these powers retroactively, which weakens the possibility of implementing the initiative, and allows arbitrariness in determining the amount deducted from the premiums. From a financial perspective, the consequences are negative, leading to an increase in public debt over time.”

Finally, Congress overrode a veto of provisions of the law that were tailored to the state of Rio Grande do Sul, which faced a public disaster last year due to rains. The vetoed article (which has now entered into force) allows the state to collect Propag benefits through the tax refund system (RRF).

Rafael Barros, researcher at FGV Ibre, says that under the current conditions of Propage, the country’s debt course will not be corrected:

– Makes it easier for countries that have behaved badly. If since 1997 they have been successively increasing and renegotiating their debt at different stages of the renegotiation programmes, why are they doing it differently now, at zero interest rates?

Castro thanked Lula for the agreement that overturned the veto:

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– We disagree and criticize when we have to criticize, but we are republicans when it comes to recognition and thanks, so I thank you on my behalf, on behalf of Governor Tarcicio (de Freitas, São Paulo), Governor (Romeo) Zema (Minas Gerais), Governor (Ronaldo) Caillado (Goiás), Governor Eduardo Leite (Rio Grande do Sul) and others who will have the opportunity to join and be entitled to the Fund.

The governor of Rio de Janeiro told parliamentarians that without these rejected tools, countries in financial crisis, such as Rio de Janeiro, would lose the ability to predict compliance with the program. The Rio government confirmed in a statement that it will join Propag.

“The elimination of the veto makes entry into the program viable, creating a fairer and more sustainable system of debt repayment for the Union, without compromising the provision of public services,” the text says.

Despite defeat on these points, the government was able to maintain its other veto, while maintaining standing criteria for accession to PROPAG, program governance, performance indicators, and financial oversight provisions.

According to National Treasurer Rogerio Ceron, Goiás, Sergipe and Minas Gerais have already submitted requests to join the renegotiation:

– We must have new protocols. There are at least three or four entities that have already indicated that they have approved their laws and should submit their applications soon.

The Minas Gerais state government submitted the application to the federation on 6 November. Yesterday, Zima thanked Congress for overriding his veto.

“This will allow more states to settle their $1 billion debt, which is only increasing due to the abusive interest rates imposed by the union,” the governor said on social media.

The Goiás government, which is subject to the fiscal recovery regime, has also confirmed that it will join Propag, having submitted the application in June. The state praised the repeal of the veto, which ensures access to the resources of the Tax Reform Fund for debt reduction. “With this change, the state will now require that this asset (FNDR) be included in the depreciation process,” the memorandum continues.

The Sergipe government did not respond when contacted.

According to information from the Ministry of the Treasury, the states’ debt to the Union amounts to approximately R$ 760 billion. Rio, São Paulo, Minas and Rio Grande do Sul account for 90% of the total.

What is propaganda and what vetoes have been overturned

• Propag allows interest discounts and repayment of debt balances over a period of up to 30 years. The states will be able to pay part of their debts by transferring movable or immovable assets, equity interests, credits with the private sector and other assets to the Union. In addition, it creates a federal equalization fund to compensate the least indebted states.

Tax Reform Fund

With the veto removed, resources from the National Fund for Regional Development (FNDR) will be allowed to be used for debt reduction. Created with the tax reform, this fund will transfer resources from the Federation to the states and the Federal District. The values ​​will reach 40 billion Brazilian reais annually from 2033. Countries with few assets, such as Rio, want to use the National Reconstruction Fund to reduce their debts.

“Accounts meeting” of business

• Another point that has returned to the law allows the Federation to deduct from the debt the amount that the state has invested in works of federal responsibility, in the years 2021 to 2023, as long as the amount is certified by the responsible federal body. This section was rejected on the grounds that it allowed the Union to assume the obligations of past years without prior formalization of the agreements, which would be unconstitutional.

RRF in countries under disaster

• Devices indicating states affected by public disasters have been removed, a point of immediate importance in the state of Rio Grande do Sul, which suffered from rains last year. With the elimination of this veto, when these states are in the fiscal recovery system, the powers of the Rapid Reaction Force will be preserved even in the event of joining Propag.