Senators approve Lula’s fiscal framework proposal

The Senate on Wednesday approved the government-sponsored fiscal framework proposal, amending the House-approved draft to make it less restrictive.

In order to provide the Luiz Inácio Lula Silva administration with more fiscal room to increase expenses, Senator Omar Aziz, the bill’s rapporteur, reverted key changes introduced by House lawmakers. This draft will now return to the House, where it will undergo another vote.

Mr. Aziz removed the educational fund Fundeb and a federal fund destined for the local Brasília government from the spending baseline used to set expenditure limits for the federal administration. 

These funds were not included in the original bill submitted by the Finance Ministry but were added by House lawmakers in order to tighten the government’s discretionary spending. Mr. Aziz also exempted spending on science, technology, and innovation from the baseline. 

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

At a public hearing on Tuesday, Marcos José Mendes, a professor at the São Paulo-based Insper business school and one of the brains behind the 2016 spending cap, argued that the Lula administration has proposed rules that are too loose. He says the path to debt sustainability either goes through tax increases or allowing inflation to corrode public debt.

Prior to the floor vote, the Senate Economic Affairs Committee members rejected two amendments proposed by the pro-Bolsonaro opposition. 

One of them would have triggered a cap on spending increases once public debt reached a certain proportion of GDP. A second would have removed from the spending baseline the expenses with nursing professionals, who have a strong lobby in Congress.

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