In order to change the Brazilian constitution, amendments must pass two rounds of votes in each congressional house—with a 60-percent majority needed in each. The pension reform, for instance, is unlikely to be approved in the lower house before the second half of the year. Amendments are difficult to pass. That is, unless you’re in an institutional crisis and Congress feels like cornering the federal government. Then, anything is possible.

This week, it took the lower house less than one hour to pass—in two rounds—an amendment stripping the government of the vast majority of its control over the federal budget.

</span></p> <p><span style="font-weight: 400;">In an overwhelming 448-3 </span><a href=""><span style="font-weight: 400;">vote</span></a><span style="font-weight: 400;">, congressmen decided that the administration must honor investments proposed by lawmakers, which currently can be deferred to future budgets. The bill is now in the Senate, where the chamber&#8217;s president Davi Alcolumbre said he will give it his &#8220;unrestricted support.&#8221; If it passes, the government will effectively control only 3 percent of the annual budget. </span></p> <p><span style="font-weight: 400;">“The proposal aims at ending the inactivity of public administrators. [Until now, the government] was neither forced to execute programs approved in the budget, nor come before Congress to justify the reasons for slashing investments,&#8221; said House Speaker Rodrigo Maia—who spent the last week engaged in a public feud with President Jair Bolsonaro. Mr. Maia says that, if the Senate approves the bill, then “the budget will no longer be a piece of fiction.”</span></p> <p><span style="font-weight: 400;">However, there are two possible consequences of the Senate passing the amendment: either the administration will disobey the federal spending cap, or there will be a government shutdown. This conclusion comes from the Independent Fiscal Institution (IFI), a Senate body created to monitor public spending.</span></p> <h2>How Brazil&#8217;s federal budget works</h2> <p><span style="font-weight: 400;">As things stand, the government already has limited wiggle room to organize the federal budget. Brazil&#8217;s Fiscal Responsibility Law, for instance, determines that no continuous expenditure can be created without a proven source of revenue—either from cuts elsewhere or new taxes. </span></p> <p><span style="font-weight: 400;">There is also the so-called “golden rule,” which stipulates that Brazil can only increase its debt to pay for investments—the money can’t be used for basic expenses, such as wages. Breaking this rule is an impeachable offense. Most recently, former President Michel Temer approved a 20-year federal spending cap, limiting the growth of federal government spending to the rate of inflation of the previous year.</span></p> <div class="flourish-embed flourish-chart" data-src="visualisation/272891"></div> <p><script src=""></script></p> <p><span style="font-weight: 400;">The government can&#8217;t manipulate the federal budget as it wants. A large chunk of it is filled with so-called &#8220;mandatory expenses&#8221;—money allocated for salaries and pensions, welfare, subsidies, and tax breaks. On top of that, sectors such as healthcare and education always eat up a bigger portion of the budget. In the case of healthcare, it will progressively increase until 2020, when it will reach 15 percent of federal net revenue. </span></p> <p><span style="font-weight: 400;">Such triggers and controls can function well in a healthy, growing economy. But Brazil has not recorded a primary surplus in six years, and the country&#8217;s debt-to-GDP ratio has reached the astonishing level of 77.4 percent. In 2013, just before the recession kicked in, that rate stood at 51.5 percent.</span></p> <hr /> <p><img class="alignnone size-large wp-image-15215" src="" alt="federal budget debt-to-gdp ratio" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>Consequences of a tied-up federal budget</h2> <p><span style="font-weight: 400;">Congress is putting even more pressure on the government to approve structural reforms and balance public accounts. This year, social security expenses will take up 32.6 percent of the total money available—excluding debt payments.</span></p> <p><span style="font-weight: 400;">As the Brazilian population is </span><a href=""><span style="font-weight: 400;">getting older and living longer</span></a><span style="font-weight: 400;">, that figure is likely to grow. With more money dedicated to pensions, other areas will suffer. Investments, which are non-mandatory, are the first to get slashed: since 2011, they have decreased by almost 66 percent to a mere BRL 36.2 billion in 2019.</span></p> <p><span style="font-weight: 400;">Trouble is coming sooner than later. The Centra Bank has lowered the GDP growth estimates to 2 from 2.4 percent this year and </span><a href=""><span style="font-weight: 400;">blocked BRL 29.8 billion from non-mandatory expenses</span></a><span style="font-weight: 400;">, after realizing that revenue has fallen and expenses increased in the first two months of the year.</span></p> <p><span style="font-weight: 400;">The measure was published on the Federal Register on Friday and contains significant cuts for the Ministries of Education and Defense. The former will see its budget slashed by BRL 5.8 billion, with BRL 5.1 frozen for the defense ministry. The government claims the move is in order to meet its primary deficit target of BRL 139 billion for this year.

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BY The Brazilian Report

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