Brazil Moves to Attach Spending Curbs to Unrelated Bill as Debt Worries Grow

Brazil's finance and planning ministries have quietly inserted spending-control mechanisms into a bill currently before Congress, a move that comes as investor anxiety over the country's rising public debt intensifies. Three sources with direct knowledge of the proposal confirmed the development, which was first reported by the local newspaper Valor Economico.

The proposed changes, if approved, are expected to generate roughly 10 billion reais (about $1.94 billion) in savings next year. One source described them as "important triggers" designed to curb the growth of mandatory spending, a key vulnerability of President Luiz Inacio Lula da Silva's leftist administration.

Under the plan, if the government's revenue and spending report preceding the annual budget bill projects a primary deficit, spending mandates created by ordinary legislation would be capped in the following fiscal year. Since the latest fiscal report projected a 52 billion reais primary deficit this year, the measures would already apply to next year's budget if lawmakers approve them.

That 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 proposes excluding oil revenue transferred to the Social Fund from the calculation of mandatory health spending, preventing windfall oil revenue from automatically boosting some expenditures tied to net current revenue.

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. The administration is lobbying Congress to approve the legislation in the coming days.

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.