Brazil’s President-elect Luiz Inácio Lula Da Silva’s transition team will study a more conservative alternative to finance social spending next year as investors anxiously await details, according to two people with knowledge of the matter.
The plan calls for the elimination of some R$130 billion (US$24.4 billion) from next year’s public spending ceiling, R$45 billion less than the proposal being discussed in Congress, the people said, asking not to be identified because the conversations are not public.
This exception would only occur in 2023, after which the Administration would implement a new rule to replace the cap, demonstrating a commitment to fiscal responsibility, they said.
LULA DA SILVA IS BACK, BUT NEITHER BRAZIL NOR THE REGION ARE THE SAME
Lula Da Silva needs billions of dollars in additional financing to fulfill his main campaign promises, including expanding welfare programs for low-income families.
To achieve that goal, Congress will have to pass a constitutional amendment that allows his Administration to bypass Brazil’s most important fiscal pillar: a rule that limits public spending growth to the previous year’s rate of inflation.
The prospects of higher spending are scaring investors and weighing on local assets.
The real and Brazil’s benchmark stock market extended their gains on the report on Lula Da Silva’s plans. The Ibovespa stock rose 1.7% in afternoon trading, while the currency strengthened 0.8% to 5.2835 per dollar.
THE WARNING TO LULA DA SILVA FROM THE ECONOMISTS OF HIS TEAM
The incoming president has chosen political allies to lead talks with Congress about spending increases. His initial plan is to remove US$175 billion from Brazil’s spending ceiling rule by 2023, and possibly later years as well.
But some members of the transition team believe the proposal sends a bad signal to financial markets that are increasingly concerned about Brazil’s fiscal outlook, the people said.
Key economists within the team, including former Central Bank president Persio Arida and even members of the left such as Guilherme Mello and former finance minister Nelson Barbosa, have warned Lula about the need to establish credible fiscal rules for the future, the people said.
At stake are the popular R$600 monthly aid that will drop to R$400 next year because Congress and current President Jair Bolsonaro did not set aside enough funds in the 2023 budget.
Bolsonaro’s chief of staff, Ciro Nogueira, said over the weekend that breaking the spending ceiling should only serve to guarantee the stability of the first year of Lula Da Silva’s government, according to a statement. “All other issues on the new government’s agenda deserve to be known first, as well as its economic policy, and then discussed within the legitimacy of the newly elected congress.”
Comments pointing to more fiscal tightening are helping markets recover after a slump that sent Brazilian stocks posting their biggest weekly decline since June on investor concern over Lula Da Silva’s economic plans. The transition team intends to set a final draft of the amendment bill by November 16, which could then be voted on before December 17.
For the full picture, see our Brazil Tax Reform: Complete Guide.