President Lula, this Thursday with the Women’s World Cup at the Brasilia event, where he resurfaced after suffering pneumonia, in an image released by the Brazilian Presidency. RICARDO STUCKERT (AFP)
The Brazilian government completed its first major economic proposal this Thursday as it celebrates three months in power. The so-called fiscal rule is a plan that aims to clean up the public accounts by mandating that public spending can only increase by 70% of the increase in revenue each year. The lifting of the spending cap, introduced as soon as the Labor Party was ousted from power in 2016, was one of the campaign promises made by current President Luiz Inácio Lula da Silva. The proposal, which is now due to go to Congress, came hours after former President Jair Bolsonaro set foot on Brazilian territory for the first time since falling from power and Lula reappeared in public after suffering from pneumonia.
PT Treasury Secretary Fernando Haddad, who is very close to Lula, was tasked this Thursday with bringing the proposal to the Senate in detail, after several postponements that left markets impatient. The fiscal rule, he explained, aims to “provide security not only for the businessman who wants to invest, but also for families who need public services in the areas of education, health or social affairs”. Brazil is one of the most unequal countries in the world. Haddad has warned that “there is no silver bullet. This is a flight plan to solve the problems.”
Markets in Brazil bobbed as parts of the proposal leaked throughout the morning leading up to the official presentation in the Senate. However, there was no significant reaction in the global Brazilian bond market. “That’s because there’s still so much to know,” explains William Jackson, chief emerging markets economist at Capital Economics in the UK. “We haven’t seen the details of the program, we don’t know how it will be changed in Congress and, more importantly, this fiscal rule replaces a much stricter fiscal rule.”
Bolsonaro, who came to power in 2019 with a promise to streamline the state, jumped the spending cap that prevented public investment from surging above the previous year’s inflation. He initially parked it in light of the emergency caused by the pandemic and to fund one of the most generous Covid relief programs in the world. And at the end of his tenure he again secured parliamentary support to break the spending ceiling, but this time for obvious electoral interests. Despite the flow of money, he lost the October election.
The goal of the Lula team’s proposal is to gradually improve executive branch budget accounts, moving from a primary deficit of -0.5% of gross domestic product (GDP) to a surplus of 1% of GDP in 2026. The proposal always poses does not yet represent the economic parameters assumed in the forecasts necessary to assess the credibility of the proposal,” explains Luciano Rostagno, market strategist at Banco Mizuho in Brazil. “In addition, depending on the economic situation, a larger primary budget surplus would be necessary to stabilize the debt.”
Rostagno points out that although the administration appears to be heavily reliant on tax revenues to meet the targets, low expectations for economic growth could make it difficult to increase tax revenues “because the current average legislator in Congress is mid -On the right side there is. Bottom Line: The proposal doesn’t seem robust enough to put government accounts back on a sustainable path as it doesn’t address increases in mandatory spending, but it at least reduces the risk of more extreme scenarios.
The proportion of spending tied up in Brazilian budgets is enormous (currently 93.7%) and the powers that be have little room for manoeuvre. And the national debt is around 77%.
The start of the Lula government is severely hampered by the proximity of his victory, as he noticeably suffers to form a parliamentary majority that he has not yet achieved, and because the economy is still quite apathetic. The central bank has raised forecasts for annual growth to 1.2% from 1% and for inflation from 5% to 5.8%. In the meantime, it is keeping interest rates at 13.75%, despite intense pressure from the government to make money cheaper, thereby reactivating both consumption and investment.
When presenting the fiscal rule, the finance minister stressed: “If those who don’t pay taxes start paying, we’ll all pay less interest.” Without going into detail, Haddad said that his recipe for increasing collection is not to increase taxes but to “end a series of abuses” perpetrated by big corporations and “sectors that have enjoyed decades of unjustified or fraudulent benefits.” have attained”.
The executive branch, led by the left-wing Lula but with ministers from the centre-right and the right, wants to present tax reform in a few months that will in principle focus on unifying the swarm of consumption taxes that are disproportionately and unfairly punished to the poorest .
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