Brazil’s Congress Passes Law Easing Government Budget Obligation

Brazil’s Congress approved legislation today that exempts the federal government from making up state and municipal budget shortfalls in a move that threatens to deteriorate fiscal accounts.

The proposal, which was approved along with the 2014 budget guidelines in a joint session of both houses of Congress, would apply to the 2013 and 2014 budgets. States and municipalities account for 31 percent of the public sector’s 167.4 billion-real ($73.7 billion) 2014 primary budget surplus target, which excludes interest payments.

Brazil’s primary budget surplus in the 12 months through September fell to 1.6 percent of gross domestic product from 2.3 percent a year earlier due to lower revenue amid slowing economic growth and increased tax breaks. The legislation could lead to further slippage in Brazil’s fiscal performance just five months after Standard & Poor’s threatened to downgrade its credit rating, Felipe Salto, economist at consulting firm Tendencias, said before the vote.

“I don’t see the sense in only the central government meeting the primary surplus,” Salto said by telephone from Sao Paulo, referring to uncertainty about whether state and municipal targets will be met. “It increases the risk of a deteriorating public sector fiscal performance.”

Proposed bills in Congress that would require higher spending on health care and a writedown of debt owed by cities and states could heighten the government’s budget challenges in coming months, Salto said.

Under the 2014 budget guidelines, the government would no longer be able to cut spending earmarked by legislators without congressional approval, further limiting flexibility on budget implementation. The law would allow the Treasury to discount from its 2014 primary budget target 67 billion reais in infrastructure investments and tax breaks.

S&P put Brazil’s rating, the second-lowest investment grade, on negative outlook in June, citing slow economic growth and expansive fiscal policy.

Treasury Secretary Arno Augustin said Nov. 7 the budget will be easier to manage next year as tax collection increases, the government reduces capital injections to public banks and the minimum wage grows at a slower pace, which helps to restrain pension payouts.

To contact the reporters on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net; Anna Edgerton in Brasilia at aedgerton@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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