Brazil’s new fiscal rules stricter than they look, finance ministry official says

11:31 am Tuesday, May 30th, 2023

BRASILIA (Reuters) – Brazil’s newly introduced fiscal framework is stricter than they appear and will require a discussion of important spending cuts, Gabriel Galipolo, the executive secretary of the Finance Ministry, said on Tuesday.

Lawmakers in the lower house of Congress last week passed the main text of legislation that is set to replace the current spending cap, which has been breached several times in recent years to allow higher government spending.

Under the new rules, government expenditures will not be allowed to rise by more than 70% of any increase in revenue, with spending growth also limited to between 0.6% and 2.5% per year above inflation. If the goals are not met, expenditure growth will be restricted to 50% of revenue rises as a penalty.

The Senate is set to vote on the legislation.

“The thing is a lot tighter than it looks,” he said at an event organized by Brazilian newspapers Valor Economico and O Globo, adding that leftist President Luiz Inacio Lula da Silva’s government would need to have discussions with the public and Congress about spending cuts in priority areas such as education and health.

The finance ministry official, who has been nominated to be monetary policy director at the central bank, also said market conditions have improved since the rules were presented, with markets now anticipating lower interest rates in the medium term and the real currency exchange rate reaching a “new level.”

Opposition lawmakers, economists and investors had raised concerns that spending by Lula’s new government could add fuel to the explosive growth of Brazil’s public debt.

Planning Minister Simone Tebet, who also participated in the same event, agreed that the version of the new fiscal rules approved last week will ensure “a positive balance,” and added that it will impose the need to cut between 32 billion reais and 40 billion reais ($6.4 billion to $8 billion) in expenditures next year.

But Tebet said getting approval for the government’s consumption tax reform, another of its priorities, would be harder, especially in the Senate.

She reiterated that there are conditions for interest rates to fall in August. Lula and his political allies have repeatedly blasted the central bank for keeping interest rates at a level they consider to be too high. The key Selic rate has remained steady at a cycle high of 13.75% since September despite slowing inflation.

($1 = 5.0033 reais)

(Reporting by Marcela Ayres; editing by Paul Simao)