Explaining Brazil #175: An obituary for Brazil’s spending cap

Since being implemented in 2016, Brazil’s public spending cap gathered some criticism from those claiming that it institutionalized austerity in the country, but the financial markets consider it one of the best tools to make the national debt more predictable and avoid massive selloffs. 

But there’s an election coming up, and President Jair Bolsonaro needs something to boost his waning popularity figures. His solution appears to be a new cash transfer program, which will increase and expand the world-renowned Bolsa Família scheme.

The problem? There’s no room for it on the budget, and part of its funding will come from outside Brazil’s federal spending ceiling — which sends all the wrong messages about the government’s commitment to fiscal responsibility. 

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Guest:

• Luciano Sobral is the chief economist at Neo Investimentos, an independent Brazilian asset management company based in São Paulo. He is also a columnist for The Brazilian Report.

This episode used music from Uppbeat. License code: TZ2EPEW7EXWLNQSY.

Background reading:

• Luciano Sobral wrote last week about the government’s moves to poke holes in the federal spending cap and essentially kill it. Last week, officials talked about asking Congress for a “license to spend.”
• The move led to massive resignations within the Economy Ministry, but department head Paulo Guedes will stay put — despite losing much of his power.
• Unsurprisingly, financial markets went haywire after the moves from Messrs. Bolsonaro and Guedes.
• The Brazilian president wants to implement a series of stimulus measures ahead of the 2022 election, even if it goes against fiscal responsibility. The goal is to improve his re-election prospects.
• The federal spending cap was created under the presidency of Michel Temer, who headed a caretaker government between 2016 and 2018. Remember how he fared as Brazil’s head of state.

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