Brazil Approves Fiscal Rules to Prevent Public Debt Spike – Reuters

By Maria Carolina Marcello

BRASILIA – Brazil’s lower house has approved a new fiscal framework proposed by President Luiz Inacio Lula da Silva, which advocates believe is essential for curbing the rise of public debt.

The new framework, set to replace a constitutional spending cap that was eliminated at Lula’s request, received 379 votes in favor and 64 against. It now awaits formal approval from the president.

The revised rules establish a more flexible limit on government spending, allowing it to increase by no more than 70% of any revenue growth. Additionally, spending growth is capped between 0.6% and 2.5% per year above inflation.

The framework mandates that if specific primary budget targets are not achieved, spending growth will be limited to 50% of revenue increases, serving as a corrective measure.

While the new rules are less stringent than the previous constitutional cap, which restricted public spending growth to inflation since 2017, they have been positively received in the markets, evidenced by a decline in interest rates on government bonds since the framework was first introduced.

Credit-rating agencies such as S&P and Fitch have also expressed approval, and the independent central bank recognizes the framework as a critical step in tackling fiscal challenges.

The bill was initially approved by lawmakers in May, but after Senate amendments, it required a final vote in the lower house.

In another development, lawmakers rejected a Senate amendment that would have allowed the government to include an annual inflation estimate, extending the expenditure ceiling while preparing the 2024 budget law, expected to be presented to Congress by the end of the month.

Moreover, the lower house is scheduled to vote this week on a proposal to raise the minimum wage. The government aimed to include in this proposal Senate measures to increase income tax exemptions for low-income individuals and introduce taxes on offshore funds to offset revenue losses. However, lawmakers in the lower house decided against voting on these additional provisions.