Brazil’s Lower House Dilutes States’ Austerity Measures – Reuters

BRASILIA (Reuters) – Brazil’s lower house of Congress approved a revised version of a bill on Wednesday aimed at imposing spending limits on financially strained states in exchange for significant debt relief.

Lawmakers voted 282-140 in favor of the bill after the government responded to pressure from state governors and removed stricter spending constraints on employee salaries. The legislation will undergo additional discussions and potential changes in the lower house before it moves on to the Senate.

In a separate address to business leaders, Finance Minister Henrique Meirelles expressed optimism about the Brazilian economy, stating that confidence is returning and the country is entering a period of growth, although fundamental issues must still be addressed to achieve balanced public finances.

Meirelles highlighted that the agreement reached with lawmakers indicated Congress’s recognition of its role in fiscal responsibility. “I am confident that we will witness a transformed country, one where confidence, enthusiasm, and hope for the future are being revived,” he stated.

He noted that increasing taxes would be a last resort and may not be necessary if the economic situation improves. Priorities for the government include limiting public spending through a proposed constitutional amendment, enhancing the governance of state-owned companies and pension funds, reforming labor laws, and enabling greater investment in the offshore subsalt oil reserves.

Although interim President Michel Temer’s administration had to accept compromises in discussions with the lower house, Meirelles emphasized that the legislation would still impose restrictions on the growth of spending to align with the previous year’s inflation rate.

The dilution of the debt relief bill raised concerns about Temer’s commitment to austerity, especially as he seeks to restore confidence in Brazil’s public finances amid the worst recession in decades.

Under the current proposal, states would receive a six-month grace period on debt owed to the federal government, followed by a year-and-a-half of reduced payments. Excessive current expenditures are largely attributed to states’ fiscal crises, which have hindered their ability to pay public sector wages.

To alleviate market concerns, the government plans to pursue new legislation aimed at amending the fiscal responsibility law, which currently limits states’ operating expenses to less than 60 percent of their net revenues.

Brazil’s budget deficit has climbed to nearly 10 percent of GDP from about 3 percent in 2013, and the country lost its investment-grade credit rating in 2015 as the recession took hold.