Brazil approves fiscal rules aimed at preventing public debt spike

By Maria Carolina Marcello

BRASILIA (Reuters) -Brazil’s lower house on Tuesday approved a new fiscal framework proposed by President Luiz Inacio Lula da Silva that advocates deem crucial for preventing an escalation in public debt.

The framework, which will replace a constitutional spending cap that was revoked at Lula’s request, passed with 379 votes in favor and 64 against. It now only needs to be formally sanctioned by the president.

The new rules include a softer cap on government spending, which cannot exceed 70% of any revenue increase. It also restricts spending growth to a range of 0.6% to 2.5% a year above inflation.

The rules further stipulate that if predetermined primary budget targets are not met, expenditure growth will be curtailed to 50% of revenue increases as a disciplinary measure.

Though less stringent than the constitutionally mandated cap, which has limited public spending growth to inflation since 2017, the new framework has been welcomed by markets where interest rates on government bonds have fallen since the framework’s initial presentation.

It has also received plaudits from credit-rating firms S&P and Fitch, and has been acknowledged by the independent central bank as a pivotal step in addressing fiscal concern.

Lawmakers initially approved the bill in May. However, due to amendments by the Senate, the text returned to the lower house for a final vote.

In a setback for the government, lawmakers rejected a Senate amendment enabling the government to incorporate a yearly inflation estimate that would have extended its expenditure ceiling when drawing up the 2024 budget law, which is due to be presented to Congress by the end of the month.

The lower house is also set to vote this week on a bill to raise the minimum wage. The government had hoped to approve in the same text Senate proposals of increased income tax exemptions for the poorest, and the taxation of offshore funds to compensate for lost revenue. But lawmakers in the lower house said they would not vote on such additions.

(Reporting by Maria Carolina Marcello, Peter Siqueira, Marcela Ayers and Carolina Pulice; Editing by Chris Reese and Christopher Cushing)