Economy

How Brazil can increase spending without blowing up its debt

While markets worry about the future of public spending under Lula, the country's Treasury Department offers a solution to untie the budgetary knot

increase spending blowing up debt
Vice President-elect Geraldo Alckmin (center) meets with Senator Marcelo Castro, rapporteur of the 2023 budget. Photo: Roque de Sá/SF

Brazilian markets have see-sawed since Luiz Inácio Lula da Silva was elected to a third presidential term on October 30, as investors worry about the fiscal policy that the next government will implement once it takes office at the turn of the year. 

Lula has so far given conflicting signals, bringing a mixture of orthodox and more spendthrift economists into his transition cabinet. In recent speeches, the president-elect has relativized the importance of fiscal responsibility — leading to steep drops in the country’s main stock index and currency exchange rate. 

Last week, the transition cabinet asked Congress for a license to spend outside of the federal spending cap on social programs. But it put no cap on how much it would be allowed to allocate to aid programs — nor an expiration date to that license to spend.

The final — and toned-down — version of the proposal could be presented as early as today. Centrist lawmakers have put their own alternatives on the table, although the transition cabinet claims that they are insufficient. The next government wants leeway to spend almost BRL 200 billion (USD 37.6 billion) outside of the cap — the alternatives propose about a third of that amount.

Many economists see Lula’s future administration essentially asking for a carte blanche, worrying about the trajectory of public debt. Moreover, without...

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