Brazil’s newest austerity bill a “step in the right direction” but not a solution

With a dramatic increase in spending on benefit schemes and health equipment, the Covid-19 pandemic put paid to almost every austerity effort implemented by the Brazilian government in recent years. As a result, the administration’s level of commitment to balancing public accounts has become a measure of Brazil’s sovereign risk. And this week, the country will try to clean up its international image by approving a constitutional amendment known in Brasília as the “Emergency PEC.”

Initially one of Economy Minister Paulo Guedes’ main reform proposals, the Emergency PEC intends to build on Brazil’s spending cap rule by establishing clear criteria for when the government may enact budget freezes and other austerity measures. The current version of the bill includes elements of a future public service reform — such as rules on when the administration may freeze civil servant salaries — and clears the way for a new coronavirus emergency aid program.

As such, House Speaker Arthur Lira wants to approve the proposal as soon as possible, and it is set to go to a vote later today.

As is, the Emergency PEC is perceived as a positive sign of commitment to fiscal balance, but actual changes may not appear for the next two years. That’s the view of Felipe Salto, executive director of the Senate’s Independent Fiscal Institution (IFI), one of Brazil’s most respected public finance institutes. In an exclusive interview to The Brazilian Report, Mr. Salto explains the main impacts the Emergency PEC is likely to have on Brazil’s public finances.

This interview has been edited for brevity and clarity.

The current Emergency PEC draft — approved by the Senate and set for a vote in the House — is facing criticism for being less ambitious than initially thought. What’s your...