The Brazilian Congress approved lifting the spending ceiling for 2023: up to US$28 billion added to Lula da Silva’s program

The future government of the PT will be able to dispense with fiscal rules throughout the next year, and would have a free hand to launch its “stimulus” program and social aid. Lula da Silva’s legislative victory is partial, since not all the provisions sent were approved.

President-elect Lula da Silva won legislative support for the abandonment of fiscal responsibility in Brazil. The “fiscal stimulus” programs and the new social aid packages mean the erosion of the primary fiscal surplus inherited from the Jair Bolsonaro administration.

With 331 votes in favor in the Chamber of Deputies, and a majority of 66 votes in favor in the Senate, the Brazilian Congress approved the lifting of the public spending ceiling for fiscal year 2023, empowering the executive branch to exceed the limits for an amount of up to R$145 billion (US$28 billion).

This is a historical and dramatic fact for fiscal discipline, since it constitutes one of the few occasions in which Congress has allowed raising the ceiling on public spending since its establishment in the year 2000 by the presidency of Fernando Henrique Cardoso.

A substantial part of the new budgeted expenses will be allocated to an increase in the assets of social subsidies within the “Auxilio Brasil” program, which from now on will be called “Bolsa Familia”. The second main source of the announced spending will be channeled to finance infrastructure works from the public sector, as part of a typically Keynesian “stimulus” plan.

The PT’s legislative victory was partial, since Lula da Silva’s original project sought to expand public spending by R$198 billion per year in 2023 (against the R$145 billion actually approved), and proposed raising the ceiling on public spending for the entire period of the new Government (when the final project only allows it to be done in 2023).

Lula da Silva’s future finance minister and former presidential candidate, Fernando Haddad, promised that the new government’s spending path will be “fiscally neutral” since changes to the country’s tax system will be proposed starting January 1. In other words, Haddad explains that the increase in spending will be offset by the increase in tax collection in 2023.

However, Lula da Silva’s technical team has not yet given further details on what exactly the proposed changes to the country’s tax system will be, nor where the resources will come from to cover a surplus of US$28 billion in the coming year.

The Bolsonaro administration managed to recover the primary surplus of public finances for the first time since mid-2014, a crucial factor to guarantee the effectiveness of the Central Bank’s monetary policy and thus avoid the spiraling of inflation.

The president of the Brazilian central bank Roberto Campos Neto warned that an irresponsible fiscal agenda will generate strong inflationary pressure, given that future expectations could end up being unanchored and a regime of “fiscal dominance” over monetary policy would be entered into.

With information from La Derecha Diario