Brazil’s Senate passes Court-ordered debt PEC; text will return to Chamber of Deputies

RIO DE JANEIRO, BRAZIL – The Senate passed the so-called Court-ordered federal debt proposed constitutional amendment (PEC) in two rounds of voting in the early afternoon of Thursday, December 2. There were 64 votes in favor and 13 against in the first round, and 61 votes in favor and 10 against in the second.

To enable a vote on the text and ensure the 49 minimum required in each round in the Senate plenary, the government leader and rapporteur for the proposal Senator Fernando Bezerra Coelho made significant last-minute amendments to the text passed last Tuesday, November 30, by the Senate’s Constitution and Justice Committee (CCJ).

The government was pressing for the bill to be passed in order to get “Auxílio Brasil” (Brazil Aid) off the ground this year. The program to replace “Bolsa Família” (Family Grant) will be paid in installments averaging R$400 (US$71). It has been proposed that the benefit will be permanent in nature, and not only for 2022, as the economic team initially proposed. The program should cover 17 million families.

In practice, the PEC defers for up to 5 years the payment of more than half of the court-ordered debt recognized by federal courts in decisions that can no longer be appealed. The estimated debt in 2022 amounts to R$89.1 billion. With the PEC, the government will have some financial leeway to fund the “Auxílio Brasil” program without exceeding the constitutional limit on budgeted expenses.

According to the bill, the maximum amount to be paid in court-order debts next year is approximately R$39.9 billion. To increase fiscal space, the text also changes the calculation of the spending cap – the limit on the increase of federal spending to the previous year’s budget, adjusted for inflation.

In the list of the main amendments made by the rapporteur is the reduction of the term in force of the Budget limit for payment of court-order debts. According to the passed bill, the spending cap, which limits the increase in spending to inflation, will need to be discussed again in 2026, a measure opposed by Economy Minister Paulo Guedes.

“Instead of remaining in force for the full duration of the New Fiscal Regime, i.e., until 2036, the sub-limit for court-order debt will extend to 2026, thereby allowing the government enough time to better monitor the process of calculation and creation of court-ordered debt and its fiscal risks, while not creating a liability that will be even more difficult to execute in the budget,” explained the rapporteur on the text’s 6th version.

Another change Bezerra made excludes measures related to the securitization of tax debts from the PEC. “The measure, although meritorious, failed to find a consensus in the Federal Senate, leaving this discussion for another time,” he said.

Also according to the latest proposal, the fiscal space created by the restriction on the payment of court-ordered debts and the change in the calculation of the government’s spending cap – a total of R$106 billion – must be entirely allocated to social projects, such as programs to fight poverty and extreme poverty, health, social assistance, and social security.

Under pressure from several legislators, the government had removed from the spending cap the debts owed the Fund for Maintenance and Development of Basic Education and Teaching Assessment (FUNDEF).

The funds owed to states and municipalities will be paid in 3 annual installments. Payment will be made according to a priority ranking organized by court-ordered debt type. Small Value Requisitions (RVPs) of up to R$66,000 will be paid first, followed by debts related to the maintenance of the elderly, people with disabilities and serious illnesses.

As it has undergone several significant changes from the text approved by the lower house of Congress, the PEC will need to return to the Chamber of Deputies for review and two more votes. A constitutional amendment may only be enacted by the National Congress and come into force after both houses reach consensus and pass an identical text.

A problem that now appears on the horizon is the Congressional recess for Christmas and New Year, which will prevent any votes before mid-January. The government wants some parts of the PEC in force before the end of December.