Government and Congress in Brazil keep legislator earmarks, remove US$22 billion from spending cap and fiscal target

RIO DE JANEIRO, BRAZIL – The administration and the Congress sealed an agreement that could raise spending to more than R$125 (US$22) billion to fight the Covid-19 pandemic, by placing these funds outside the fiscal target and the constitutional spending cap, the rule that limits raising government spending in one year greater than inflation the prior year.

In the same agreement, the government yielded to pressure from legislators and must preserve R$16.5 billion in earmarked funds within the budget, by cutting costs and investment spending.[Earmarked funds must be spent where members of Congress, not the Treasury or executive branch, want them spent.]

The breakthrough in negotiations came in the wake of a series of clashes between the government and Congress over the sanction of the 2021 Budget and the delay in relaunching emergency programs to address the new, more aggressive wave of Covid-19. “In the end, those who needed to have tranquility succeeded in negotiating to meet the budgetary and political needs of the moment,” said Chamber president Arthur Lira (Progressistas-AL).

On one of the fronts, the DEM leader in the Chamber, Efraim Filho, included a bill that changes the Budget Guidelines Law (LDO) with an amendment presented by Senator Rogério Carvalho (PT-SE) that authorizes discounting from the fiscal target extraordinary expenses in the health area, specifically the credit program for micro and small companies (PRONAMPE), and the benefit for companies that reduce working hours and salaries or suspend workers’ contracts temporarily (BEm).

The current fiscal target allows for a R$247.1 billion deficit and could be exceeded by introducing these measures. In the cap, these expenses are no longer included because they are financed through extraordinary credits.

The bill does not provide value limits. Economic experts considered this a “blank check” risk, just what Economic Minister Paulo Guedes wanted to prevent by presenting a Proposed Amendment to the Constitution (PEC) for congressional earmark resources.

However, Efraim said that the forecast is to allocate R$10 billion to the BEm, R$10 billion to PRONAMPE, and R$20 billion to health. The values are higher than announced by the Ministry of Economy, which said to expect R$10 billion for the employment program and R$5 billion for credit to microenterprises.

“No one can deny the need to help the productive sector and the unemployed. With companies closing their doors, the scenario of a devastated economy is of interest to no one. The voices that say it’s a cap breacher are demagogy. Brazil can’t be left behind, and this can’t be confused with a ‘blank check,'” says the leader. The text was passed on Monday, April 19th, both in the Chamber and in the Senate.

The government is now authorized to discount R$44 billion from the cap and target with emergency aid. The Executive has now opened three extraordinary credits, totaling R$10.9 billion, in favor of the Ministry of Health.

Moreover, there are still the expenses inherited from last year with the purchase of vaccines, tourism infrastructure (for one of the most affected sectors), and residuals from the emergency aid and the 2020 employment program, whose forecast is at least R$30.9 billion, according to data from the National Treasury Monitoring Panel. As a result, the projected cost against Covid-19 in 2021 could reach R$125.8 billion.

Budget experts have criticized the solution found by Congress since it wriggles around fiscal rules and resumes practices of former governments, which deducted from the fiscal target Growth Acceleration Program (PAC) investments to ease concerns about the situation of public accounts. The text does not eliminate the technicians’ fear of signing and approving credits of such huge amounts without a specific Constitutional provision.

In the same bill, Efraim Filho included a device that allows the government to block discretionary spending by decree (which includes funding and investments) to recompose mandatory expenses, such as social security benefits, unemployment insurance, and subsidies, which were understated by R$ 21.3 billion, according to the opinion of Chamber technicians based on data from the Ministry of Economy.

The device will help the economic team implement the reallocation studied since last week and aimed to preserve the maximum indications of earmarked funds for legislators, even at the expense of spending by the Executive itself. According to the DEM leader, this ‘cut’ for the government will represent R$9.5 billion.

During the budget vote, rapporteur Senator Marcio Bittar (MDB-AC) reduced R$29 billion in Executive spending and earmarked funds benefitting individual legislators. After the approval, the economic team began to complain that the agreement had been only for R$16.5 billion in earmarks, and began to advocate a partial veto by the President, which led to attrition by Guedes and his team in Congress.

On Monday, April 19th, Government Secretary Flavia Arruda said that the government and Congress reached an agreement to veto R$10.5 billion in obligatory earmarks. This, along with a cut in discretionary earmarks, should be enough to keep the earmarked funds at the value agreed with deputies and senators.

The government leader in the Chamber, Ricardo Barros, said that the amendment would also help solve the impasse in the sanction of the 2021 budget. “We are working out a general agreement. This amendment should solve it to have a partial veto (in the Budget),” he said.

GLASS CAP

Expenses that are left out of the spending cap and the fiscal target are listed below:

– R$44 billion in emergency aid

– R$10 billion from the program that allows companies to reduce salaries and working hours or suspend contracts (BEm)

– R$10 billion for a new round of subsidized credit for micro and small companies

– R$20 billion for new health spending

New credits for health already opened in 2021

– R$2.9 billion on February 24th

– R$5.3 billion on March 30th

– R$2.7 billion in April 16th

Expenses that were contracted in 2020 but should be paid this year

– R$22.3 billion for the purchase of vaccines

– R$4.5 billion from the previous round of BEm

– R$2.3 billion from the 2020 emergency aid

– R$1.9 billion for tourism infrastructure

– R$125.8 billion in total

Source: Ministry of Economy and National Congress