Rousseff Takes Political Hit on Brazil Spending With Long Fuse

Brazil’s President Dilma Rousseff
Brazil’s Supreme Court on Friday gave the green light to investigate the heads of both houses of Congress while ruling out a probe into President Dilma Rousseff in the country’s largest corruption scandal. Photographer: Paulo Fridman/Bloomberg

Brazilian President Dilma Rousseff took a political hit when the lower house voted to raise spending on pensions. The big fiscal blow wouldn’t be felt for several years.

Lawmakers in the lower house, including members of Rousseff’s own party, on Wednesday passed the amendment over her opposition as part of a broader bill designed to shore up fiscal accounts. Because the measure boosts pensions for people retiring after it takes effect, the greatest impact would come in later years.

Still, the defeat is the latest evidence of the government’s challenge to build support for Rousseff’s austerity measures. She now has less than three weeks to work with the opposition and reluctant members of her own coalition to push measures worth 14.5 billion reais ($4.8 billion) in savings through the Senate. The bills expire June 1.

“This shows how much Rousseff will have to negotiate each individual detail of every measure in Congress, and shows that the coalition is not solid,” Andre Cesar, an independent political analyst who previously worked at consulting firm CAC Consultoria, said by telephone. “This is eminently a political loss.”

The real appreciated 1.5 percent on Thursday to 2.9942 per U.S. dollar, the biggest gain among major Latin American currencies tracked by Bloomberg. The benchmark Ibovespa stock index rose 0.5 percent.

Rousseff Veto

Rousseff will veto the amendment if it passes through the Senate as expected, analysts at political consulting firm Eurasia Group wrote May 14. Lawmakers probably wouldn’t challenge the veto in a vote for months, giving the administration time to work with lawmakers on an alternative with less of an impact on government spending, they wrote.

Speaking in Sao Paulo on Thursday, Finance Minister Joaquim Levy said he would give the Senate a chance to evaluate the lower house vote before announcing any plans on the amendment. Lower House President Eduardo Cunha, a member of Rousseff’s largest coalition partner, the PMDB, said hours later that lawmakers would override any presidential veto.

Even if that occurs, the amendment will have little impact on government spending before Rousseff is scheduled to step down in January 2019, Fabio Klein, a public-finance analyst at Tendencias Consultoria in Sao Paulo, said by phone.

The measure would boost pensions for some Brazilians who start retiring after it takes effect, raising federal expenditures by 40 billion reais over the next 10 years, according to Jose Guimaraes, the government’s leader in the lower house. The cost would be greater toward the end of the decade, Klein said.

“The short-term impact on the budget is negligible,” he said. “That gives the government more time to deal with the situation.”

Rousseff’s fiscal policies are designed to achieve a budget surplus this year after her administration ran a deficit before interest payments in 2014. She vows to protect Brazil’s investment grade, which came under threat when Standard & Poor’s in 2014 cut its rating to one level above junk.

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