BRASILIA (Reuters) – Brazil’s Congress approved its budgetary guidelines bill on Tuesday, setting the goal of eliminating the primary deficit by 2024, but including a provision allowing for a limited reduction in expenses even if it implies not achieving the fiscal goal.
During a joint session, senators and deputies approved the proposal.
President Luiz Inacio Lula da Silva said in October it was unnecessary to erase the budget deficit by next year given the importance of funding for priority projects and construction investments.
That remark sent a chill through markets and sparked intense government debates about a potential relaxation of the goal before it was voted on by Congress.
But Lula decided to maintain the proposed zero fiscal target, which has always been viewed skeptically by economists due to its high reliance on extra revenue, after Finance Minister Fernando Haddad convinced the leftist president that any spending cuts would be limited.
Under new fiscal rules approved by leftist Lula’s administration, annual expenses should grow no less than 0.6% and no more than 2.5% above inflation, with the additional constraint of being limited to 70% of revenue growth.
This framework works in conjunction with the definition of a target for Brazilian public accounts, which was set as zero primary deficit for 2024.
The Finance Ministry had argued that the minimum increase of 0.6% in expenses should always be met, regardless of its impact on achieving the fiscal target.
Under the bill approved, allocations following the spending rule of the government’s new fiscal framework should not be subject to limitations.
In practical terms, this interpretation is expected to cap government budget cuts in 2024 at about 23 billion reais ($4.69 billion). Economists had estimated that without this provision, the figure could reach 53 billion reais.
(Reporting by Marcela Ayres and Maria Carolina Marcello; Editing by Paul Simao and Diane Craft)
