At the World Economic Forum in Davos, Brazil’s Finance Minister Fernando Haddad pledged to submit a new fiscal framework proposal to Congress “by April.” That new framework would replace Brazil’s public spending cap as the country’s fiscal anchor.
This new pledge is bolder than the one Mr. Haddad made earlier this year, when he promised to submit the bill by the end of the first half of 2023.
Fiscal uncertainty has been a major risk factor for the Brazilian economy, the Central Bank says, as it affects the exchange rate and economic expectations. The monetary authority said it would not hesitate to further raise interest rates (currently at 13.75 percent) if inflation doesn’t recede in a durable way.
Under the current public spending cap — in force since 2017 — the government’s expenditure can only be increased in line with the inflation rate of the previous year. The spending rule can only be repealed by way of a constitutional amendment, which would require a 60-percent majority in two rounds of voting in both the House and Senate.
While created as an instrument to foster market confidence in the Brazilian government, the cap has had a number of holes poked in it since its inception. The Jair Bolsonaro administration approved four constitutional amendments that allowed the government to spend BRL 236 billion (USD 46 billion) above the original limits.
Economist Felipe Salto, who led a fiscal think tank in the Senate, argued that the spending cap has lost credibility. During a debate about the transition constitutional amendment approved late last year, President Luiz Inácio Lula da Silva called the cap “stupid.”
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