Brazilian Senate keen on giving government more fiscal room

Senator Omar Aziz and Planning Minister Simone Tebet. Photo: Lula Marques/ABr

Senator Omar Aziz, the rapporteur of the Finance Ministry’s fiscal framework proposal in the Senate, on Thursday said he will remove key expenses from restrictions imposed by the draft legislation.

Lawmakers in the House added educational fund Fundeb and a federal fund destined for the local Brasília government into the spending baseline used to set expenditure limits for the federal administration. These funds were not included in the original bill submitted by the government.

Fundeb is expected to cost the federal government around BRL 40 billion (USD 8.3 billion) annually, while the so-called “constitutional fund” disbursed to the local government in Brasília totals around BRL 23 billion (USD 4.7 billion). Planning Minister Simone Tebet said that, without Mr. Aziz’s changes, the government’s discretionary spending would be compromised.

The bill was approved in the House by an overwhelming 372-108 majority on May 24, but with more restrictions on spending than initially proposed by the Luiz Inácio Lula da Silva administration. With the changes suggested by Mr. Aziz, the government would gain more leeway to spend.

However, if these changes are made, the bill will have to return to the House (until both chambers agree on the same text, the bill will ping pong between them) — where it would need to undergo another vote.

A Senate floor vote is expected next week.

The new fiscal framework was designed to replace the spending cap adopted in 2016, which limits public spending to no more than the official inflation rate of the previous year.

The new rules aim to provide fiscal controls while giving the administration some flexibility to finance social programs and investments. Under the proposed rules, growth in spending would be limited to 70 percent of revenue growth if primary surplus targets are met. For example: if revenues grow by 2 percent, expenditures can grow by up to 1.4 percent plus inflation.

The International Monetary Fund (IMF) has said it “strongly supports” the government’s commitment to improving Brazil’s fiscal position and achieving a primary budget surplus of 1 percent of GDP by 2026. Conversely, the Independent Fiscal Institution (IFI), a think tank operating under the Senate’s umbrella, is less impressed, arguing that the new rules are too complex.