President Luiz Inacio Lula da Silva sent congress a proposal to shore up Brazil’s public finances after ordering a change that added uncertainty over the government’s ability to boost its revenues — a key element for the plan’s success.
(Bloomberg) — President Luiz Inacio Lula da Silva sent congress a proposal to shore up Brazil’s public finances after ordering a change that added uncertainty over the government’s ability to boost its revenues — a key element for the plan’s success.
The finance ministry released a draft of the bill on Tuesday and Lula personally delivered the proposal to lower house Speaker Arthur Lira during an afternoon meeting. It will set the stage for the first major test of his government’s strength in congress.
Approval of the new fiscal framework is crucial to Lula’s efforts to soothe market concerns about his spending plans, as the leftist leader seeks to kick-start Brazil’s economy and deliver on campaign promises of prosperity for all. Initial details of the plan released last month helped boost investor confidence in Latin America’s largest economy, but changes introduced just before the bill was sent to lawmakers left investors worried.
Among them was Lula’s decision to scrap a proposal that would ensure that small purchases made abroad through popular websites such as Shein or Shopee are taxed according to the law, which would have brought in about 40 billion reais ($8 billion) in extra revenue. Some of those companies were taking advantage of a tax exemption intended only for transactions of up to $50 between individuals, according to Finance Minister Fernando Haddad, who championed the idea.
But Lula forced Haddad to backtrack after public outcry over the proposal. While the finance chief has said his team has mapped out 300 billion reais in revenue-boosting measures, his defeat on the matter rekindled investor concerns that the current proposal relies too much on revenue growth.
The Brazilian real weakened 0.8% to 4.98 per dollar and swap rates rose.
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After delivering the proposal to the heads of both houses of congress, Haddad said the president’s decision won’t derail the plan as the government intends to review one quarter of current tax exemptions.
But not all changes watered down the original plan. The economic team also inserted measures to prevent the use of extraordinary revenues to boost spending. Instead, additional revenue that leads to a higher-than-expected primary surplus will be partly used to finance public investment, and partly to reduce public debt, according to the proposal.
Extraordinary income will also be excluded from the spending rule to ensure that only recurring revenues are used as a reference in calculations of how much public expenditures are allowed to grow.
Primary Surpluses
The backbone of the plan, which will replace a so-called spending cap rule that limits the growth of public expenditures to the rate of inflation, includes a ceiling and floor for the expansion of public outlays. It would limit spending to 70% of revenue growth, or 50% if the government fails to meet its budget surplus targets. Primary spending would always increase between 0.6% to 2.5% per year, even if the economy shrinks.
The proposal also targets a primary fiscal surplus of 0.25% to 0.75% of gross domestic product for 2025 and 0.75% to 1.25% of GDP for 2026. For 2024, the goal is to eliminate the primary fiscal deficit, which doesn’t take into account interest payments, but the range of tolerance would still allow for a gap of 0.25% of GDP.
If the government fails to comply with the target, the economic team will have to limit spending with measures that include avoiding new tax cuts or exemptions.
Lula’s economic team hopes the plan will create space for the central bank to reduce Brazil’s benchmark interest rate, which policymakers have held at a six-year high of 13.75%. The president has criticized the bank, arguing that its decision to maintain high borrowing costs has hurt the economy.
Read More: Brazil Inflation Hits Lowest Since 2021 Before Fiscal Debate
The government’s political team expects congress to approve the plan in the first half of the year, before its mid-year break, Minister of Institutional Relations Alexandre Padilha said in a Tuesday interview with a local radio station. After getting the text, Arthur Lira said he believes it’s possible to pass the bill until May 10.
But the road ahead may not be clear. Lula is still struggling to build a reliable base of support in congress, and efforts to limit spending may face resistance from some within in his Workers’ Party.
Lira will now determine which representative will oversee the process in congress, which could consider changes to the plan. Brazil’s Senate also needs to approve the proposal in order for it to go into effect.
(Updates with comments from finance minister, house speaker starting in 5th paragraph.)
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