Brazil’s new Finance Minister Fernando Haddad on Monday pledged to replace Brazil’s federal spending cap with a “trustworthy” long-term new fiscal framework. He said he would submit the proposal to Congress by the first half of this year.
“A strong state is not a big, obese state. It is a state which responsibly delivers what the Constitution defines,” he said in a speech delivered in the building where the transition cabinet worked for the past two months instead of the Finance Ministry building.
Yesterday, in his inaugural speech before a joint session of Congress, President Luiz Inácio Lula da Silva called the spending cap — which only allows the government to raise its budget to match the previous year’s inflation rate — a “stupid” instrument and pledged to revoke it. The cap was codified into the Constitution in 2016 and can only be repealed through a constitutional amendment, requiring a 60-percent majority in both congressional chambers.
Mr. Haddad echoed Lula’s January 1 talking points, by referring to the Jair Bolsonaro administration as a “terrible nightmare” and pledging to “rebuild” the framework of economic policies.
Mr. Haddad said that in 2022 the Bolsonaro administration struck “hard blows” to fiscal austerity through the former president’s attempt to win re-election, such as including millions of new beneficiaries into social programs and issuing tax waivers for companies with ideological proximity to the former administration.
On December 30, the outgoing administration published a decree decreasing taxes for large companies. The measure lasted for just two days, as President Lula revoked its provisions in one of his first acts in office.
The new finance minister argued that the new government has already shown it has congressional support. It managed to pass a constitutional amendment giving Lula a one-year spending waiver with the backing of 70 percent of House members. Lula was granted enough budgetary space to keep several programs from starting the year in shutdown mode.
“We are not here for adventures,” Mr. Haddad added. “We are here to ensure the country resumes growth as a way to ensure the population’s needs are met.” He also pledged to resume commercial relationships with other countries and attract investments.
Mr. Haddad also said the new administration would “democratize access to credit.” Per Infinity Asset, Brazil has the world’s highest real interests (discounting for inflation) after undergoing its steepest monetary tightening process since adopting an inflation target system in 1999.
The Central Bank raised the Selic benchmark rate 12 consecutive times between March 2021 and August of this year. It has maintained the rate stable for its past two policy meetings.
Investors were not friendly to the first working day of the new administration. At around noon local time, the dollar was up 1.1 percent against the Brazilian real, and the Ibovespa stock index had crashed by 3.2 percent.
Meanwhile, market agents polled by the Central Bank have raised their 2023 inflation expectations, from 5.08 to 5.31 percent over the past four weeks. Skepticism around the new government’s commitment to fiscal responsibility is one of the reasons.
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