Brazil Congress Approves Spending Curbs as Debt Worries Grow

Brazil's Congress has approved a set of spending-control mechanisms proposed by the government, a move aimed at curbing the country's rising public debt. The measures were passed by both the lower house and the Senate on Wednesday and now head to President Luiz Inacio Lula da Silva for sanction.

The proposal was attached to an unrelated bill by the finance and planning ministries, as investors question the administration's commitment to a more forceful fiscal adjustment. The changes are expected to generate savings of about 10 billion reais ($1.94 billion) next year by slowing the growth of mandatory spending, according to Finance Minister Dario Durigan.

Mandatory spending is seen as a key vulnerability for Lula's leftist government. Under the new rules, if the government's revenue and spending report projects a primary deficit, spending mandates created by ordinary legislation would be capped in the following fiscal year. Since the latest report projected a 52 billion reais primary deficit this year, the measures would apply to next year's budget.

This means programs tied to non-constitutional rules could not grow faster than the real spending limit under Lula's fiscal framework, which allows annual increases of 0.6% to 2.5%. The government also proposed excluding oil revenue transferred to the Social Fund from the calculation of mandatory health spending, preventing windfall oil revenue from automatically boosting some expenditures.

The triggers would remain in effect until the government posts an annual primary surplus. The changes were inserted into a bill that approves offsetting tax breaks adopted to cushion the impact of higher oil prices with additional government revenue generated by the commodity's rally.

"We took the opportunity to introduce permanent measures that help us in controlling mandatory spending," Durigan said. Lula, who is seeking reelection in October, does not explicitly address the need for a more ambitious fiscal adjustment in his campaign platform for the next four years.