Temer Proposes Spending Cap in Effort to Fix Brazil’s Budget

Brazil Is Unraveling Before Our Eyes
  • Acting president presented the amendment to party leaders
  • Government aims to reduce expenses and control debt levels

Brazil’s Acting President Michel Temer proposed to legislators on Wednesday spending caps that are designed to shrink a near-record budget deficit and restore investor confidence in Latin America’s largest economy.

The proposal would amend the constitution, essentially freezing current government expenditures in inflation-adjusted terms through 2036, though there would be the possibility of adjustments after the first 10 years, according to a statement from the Finance Ministry. Any increase in revenue stemming from an economic recovery would go to narrow the budget deficit instead of more spending.

Brazil’s budget gap has ballooned in recent years to around 10 percent of gross domestic product as tax revenue slumped amid a prolonged recession. Temer’s measure would not only help put Brazil’s public accounts back on track, but also would boost consumer and business confidence, said Finance Minister Henrique Meirelles.

"The government works like any household, company or organization," Meirelles told reporters after the proposal was presented. "You can’t indefinitely continue to spend much more than society is capable of paying."

Brazil’s equity and currency markets rose on Wednesday, with the Bovespa stock index closing up 0.6 percent.

The Proposal

Under the proposal, all expenditures would be adjusted merely by the previous year’s inflation rate, including outlays for health and education. Spending for those two areas is currently adjusted based on tax income. The government isn’t considering tax increases for now and will present proposals for further spending cuts, including pension outlays, which is the third-largest spending category, not including debt servicing, Meirelles said.

In an effort to help enforce the new rules, the government proposes penalties for state entities that include a freeze on salaries and hiring of civil servants.

Temer presented the amendment to leaders of coalition parties in a closed meeting in the presidential palace, giving up plans to deliver the proposal in person to Senate President Renan Calheiros, who according to local media now wants the bill to be voted only after a final decision on the impeachment of suspended president Dilma Rousseff. The Senate is expected to make that decision in August.

Temer’s amendment requires a two-thirds majority in both chambers of Congress. During his first month in office, the acting president won by a wide margin approval for legislation that reduces legally-mandated spending requirements, a measure that makes it easier to cut expenditures.

"The sooner this is approved, the better," Meirelles said about the spending cap in an interview televised on GloboNews Wednesday night.

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