Who controls the purse strings in the Brazilian government?

The Jair Bolsonaro administration may be going through a defining moment regarding its economic policy. Some of the president’s key advisers — including the government’s military wing — advocate for increasing public spending in order to offset the economic effects of the pandemic and kickstart the economy. This would include major infrastructure projects, as well as social policies — in a clear strategy to make Mr. Bolsonaro’s re-election in 2022 viable.

These advisers are clashing with the government’s pro-austerity branch, headed by Economy Minister Paulo Guedes. Since the 2018 campaign, Mr. Guedes has been the “guarantor” of Mr. Bolsonaro’s economic policy — the insurance that the government would guide itself through pro-market reforms, employing the utmost zeal to tame public spending.

As the backdrop to this dispute, the government is preparing its draft of the 2021 budget, which must be submitted to Congress by the end of the month. At stake is one of the most effective instruments to tame the public deficit: the federal spending cap. Created late in 2016 amid considerable controversy, it states that the federal budget can only grow from one year to the next in order to match inflation. 

Behind the scenes, however, the government is trying to create breathing room to spend more money. Earlier this year, Congress voted on the creation of a so-called “War Budget,” creating a separate budget for spending related to the Covid-19 pandemic — and now the tug of war will decide if other spending areas will be included as “exceptions” to federal spending rules.

Or, whether this parallel budget may be extended for an extra year — until December 2021. 

The Senate-affiliated Independent Fiscal Institute had already admitted there is no space to increase expenditures without breaking the cap. For 2021, mandatory spendings — including pensions and payroll — are likely to swallow up almost all of what is available.

Alessandra Ribeiro, director of Macroeconomics and Sector Analysis at consultancy firm Tendências, tells The Brazilian Report that the risk of noncompliance with the spending cap and fiscal disorder is increasing.

“The...