Bloomberg — Brazil President-elect Luiz Inacio Lula da Silva’s transition team will weigh a more conservative alternative to finance next year’s social outlays as investors eagerly await spending details, according to two people with knowledge of the matter.
The plan calls for removing about 130 billion reais ($24.4 billion) from the public spending cap next year, 45 billion reais less than the proposal that is under discussion in congress, said the people, who requested anonymity because the talks aren’t public. Such an exception would only occur in 2023, after which the administration would implement a new rule to replace the cap, demonstrating a commitment to fiscal responsibility, they said.
Lula needs billions of dollars in extra financing to fulfill his top campaign pledges including expanded social aid for poor families. To achieve that goal, congress will have to approve a constitutional amendment allowing his administration to circumvent Brazil’s most important fiscal pillar: a rule that limits public spending growth to the prior year’s inflation rate. Prospects of greater expenditures are spooking investors and weighing on local assets.
Brazil’s real and benchmark stock exchange extended gains amid the report on Lula’s plans. The Ibovespa stock exchange rose 1.7% in late afternoon trading, while the currency strengthened 0.8% to 5.2835 per dollar.
The incoming president chose political allies to lead talks with congress about more spending. Their initial plan is to remove 175 billion reais from Brazil’s spending cap rule for 2023--and possibly also for years beyond.
But some members of the transition team believe that proposal sends a bad signal to financial markets that are increasingly concerned about Brazil’s fiscal outlook, the people said.
Key economists within the team, including former central bank President Persio Arida and even left-leaning members such as Guilherme Mello and former Finance Minister Nelson Barbosa, have warned Lula about the need to establish credible fiscal rules for the future, the people said.
At stake are popular monthly payments of 600 reais that are set to fall to 400 reais next year because congress and current President Jair Bolsonaro didn’t set aside enough funds in the 2023 budget.
Bolsonaro’s Chief of Staff Ciro Nogueira said over the weekend that breaching the spending cap should only be used to guarantee stability for the first year of Lula’s government, according to a statement. “All other topics on the new government’s agenda deserve to be known first, as well as its economic policy, and then discussed within the legitimacy of the newly-elected congress.”
The comments signaling more fiscal restraint are helping markets recover after a downturn which saw Brazilian stocks post their biggest weekly decline since June as investors fretted over Lula’s economic plans. The transition team intends to establish a final draft of the amendment bill by Nov. 16 which could be then voted before Dec. 17.
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