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LATIN AMERICA | 23-11-2022 14:10

Lula’s advisers, Congress seek middle ground in spending plan

Negotiations underscore a problem that has long concerned policymakers across the political spectrum — that the current fiscal rule, which sets a ceiling that limits spending growth to the previous year’s inflation rate, is impractical.

Advisers to President-elect Luiz Inacio Lula da Silva and members of Brazil’s congress are discussing a more moderate spending plan after last week’s budget proposal sent local markets plunging, according to two people with knowledge of the matter.


The plan will likely be put in front of Lula later this week after he walked back his own comments dismissing investors’ concern that a surge in government spending would undermine efforts to rein in inflation. While Lula’s economists are pushing for a fiscal stance that investors consider credible, his political advisers want to ensure they line up enough funds to pay for social programs without having to negotiate spending waivers with congress every year.

A key voice in deciding the final outcome is lower house Speaker Arthur Lira, who is inclined to accept a more moderate package in exchange for support for his bid to remain in his post, a third person said.

One of the ideas under consideration, the economic advisers said, is to circumvent the country’s key fiscal rule for two years, as opposed to indefinitely as previously suggested, in order to finance Brazil’s biggest cash handout program.

The advisers, who asked for anonymity because the discussion isn’t public, stressed that no decision has been made as negotiations are ongoing.

The negotiations underscore a problem that has long concerned policymakers across the political spectrum — that the current fiscal rule, which sets a ceiling that limits spending growth to the previous year’s inflation rate, is impractical. Some of Lula’s advisers are pushing for the rule to eventually be replaced with new legislation that would make it more politically viable while still ensuring spending is kept in check.

The budget proposal that’s being negotiated with congress will make it easier to change the so-called spending cap in the future, Aloizio Mercadante, the coordinator of Lula’s transition government, told reporters on Tuesday. The mechanism under discussion would allow modifications to the rule to be approved by simple majority, instead of a constitutional amendment that requires the backing of three-fifths of lawmakers.

Vice President-elect Geraldo Alckmin added during the same news conference that the new fiscal anchor would ideally take into consideration the trajectory of public debt with efforts to deliver primary budget surpluses.



Market Jitters
Last week, a proposal to indefinitely exempt cash handouts from the fiscal rule, which would breach the cap by 175 billion reais ($33 billion) in 2023, triggered a market rout that forced several members of Lula’s transition team to reaffirm the incoming government’s commitment to a sound budget. That tumble followed a similar one a week earlier.

Over the weekend, Lula himself made a nod to investors, saying in Lisbon that his government will be fiscally prudent and markets have no reason to fear otherwise.

Lula’s transition team includes a mix of liberal and left-leaning economists such as ex-central bank chief Persio Arida and former Finance Minister Nelson Barbosa. Their previous push for a more conservative budget, seeking a spending waiver for one year only, was overruled last week by political advisers who worry about the political cost of repeatedly negotiating with congress exemptions to the spending rule.  

Yet political advisers are now aware that a solution to the budget will have to be negotiated. Representative Reginaldo Lopes, the leader of Lula’s Workers’ Party in the lower house, said late Monday that while the party’s goal is to give the president-elect as much fiscal room for manoeuvre as possible, the spending proposal will certainly be adjusted during negotiations in congress.

“The Lula administration knows that there is no social gain without fiscal stability,” he added on Tuesday.

 

By Martha Beck and Daniel Carvalho, Bloomberg

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