Brazil unveils new budget rules to ease market jitters on fiscal discipline

By Marcela Ayres

BRASILIA (Reuters) – Brazil‘s Finance Ministry unveiled on Thursday a proposal for new fiscal rules to balance limits on spending growth with the government’s vow to boost social programs and public investment.

The long-awaited proposal is key to easing fiscal concerns after leftist President Luiz Inacio Lula da Silva secured congressional approval to bypass a constitutional spending cap. His spending vows and criticism of the central bank have pushed up inflation expectations since he took office in January.

The new fiscal framework proposed in a Finance Ministry presentation on Thursday combines a looser spending cap with primary budget targets, as reported by Reuters on Wednesday.

The rules would allow public spending to grow between 0.6% and 2.5% per year above inflation. Spending growth would also be limited to 70% of revenue growth in the prior 12 months.

The new framework, which needs congressional approval, would replace the constitutional ceiling that has prohibited any spending increases above inflation since 2017. Brazil has allowed repeated exceptions to that rule in recent years, undermining its credibility with economists and investors.

As Reuters reported on Wednesday, the new framework would also target zero primary deficit in 2024, followed by a primary surplus equal to 0.5% of GDP in 2025 and 1% of GDP in 2026. The primary budget target would have a margin of plus or minus 0.25 percentage points.

This years primary deficit target, the first of the Lula administration, is 228.1 billion reais ($44 billion). However, the Finance Ministry recently estimated that the shortfall will be 107.6 billion reais, equal to 1.0% of GDP, helped by a jump in expected tax revenue.

(Reporting by Marcela Ayres; Editing by Brad Haynes)