Lula’s team weighs a more conservative spending plan for Brazil

Bloomberg — Brazil’s President-elect Luiz Inácio Lula da Silva’s transition team will weigh a more conservative alternative to funding next year’s social spending as investors eagerly await details of the spending, according to two people with knowledge of the matter.

The plan calls for removing some 130 billion reais ($24.4 billion) from next year’s public spending ceiling, 45 billion reais ($8.4 billion) less than the proposal being discussed in congress, the people said., who requested anonymity because the conversations are not public. That exception would only occur in 2023, after which the administration would apply a new rule to replace the cap, demonstrating a commitment to fiscal responsibility, they said.

Lula needs billions of dollars of additional financing to fulfill his main campaign promises, including the extension of social assistance to poor families. To achieve that goal, Congress will have to pass a constitutional amendment that allows his administration to circumvent Brazil’s most important fiscal pillar: a norm that limits the growth of public spending to the inflation rate of the previous year. Prospects for higher spending spook investors and weigh on local assets.

The real and Brazil’s benchmark stock market extended gains amid the report on Lula’s plans. The Ibovespa stock market rose 1.7% in afternoon trading, while the currency strengthened 0.8% to 5.2835 per dollar.

Bad signal

The incoming president chose his political allies to lead talks with Congress about increasing spending. His initial plan is to remove 175 billion reais (US$32.8 billion) from Brazil’s spending cap rule by 2023, and possibly for later years as well.

But some members of the transition team believe that such a proposal sends a bad signal to financial markets that are increasingly concerned about Brazil’s fiscal outlook, the people said.

Key economists within the team, including former central bank president Persio Arida and even leftists like Guilherme Mello and former Finance Minister Nelson Barbosa, have warned Lula about the need to establish credible fiscal rules for the future, the people said.

At stake are the popular monthly payments of 600 reais that will be reduced to 400 reais next year because Congress and current President Jair Bolsonaro did not set aside enough funds in the 2023 budget.

Bolsonaro’s chief of staff, Ciro Nogueira, said over the weekend that breaking the spending ceiling should only serve to guarantee stability for Lula’s first year in government, according to a statement. “All other issues on the new government’s agenda deserve to be known first, as well as its economic policy, and then discussed within the legitimacy of the newly elected congress.”

Comments pointing to more fiscal containment are helping markets recover after a slide that sent Brazilian stocks posting their biggest weekly decline since June as investors worried about Lula’s economic plans. The transition team intends to set a final draft of the amendments bill by November 16, which could be voted on before December 17.

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Lula’s team weighs a more conservative spending plan for Brazil