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Brazil’s congress approves looser spending rules in boost for Lula

Brazil’s congress has given President Luiz Inácio Lula da Silva the first significant legislative win of his administration, voting for rules to loosen limits on public expenditure.

The so-called new fiscal framework replaces a stricter cap on spending and makes it mandatory for budgets to increase by more than the rate of inflation. It is the cornerstone of the leftwing president’s promises of extra money for social welfare and infrastructure in Latin America’s largest economy.

Representatives in Brasília’s lower house gave final approval on Tuesday despite simmering investor concerns about government profligacy and the potential impact on public borrowing.

The bill’s passage is a milestone for Lula, who previously ruled between 2003 and 2010 and returned to power in January after his election win over Jair Bolsonaro. It paves the way for a major public works programme underpinned by R$370bn ($74bn) of federal funds over four years.

“The new framework expands the government’s margins for investments and spending. In this sense it is a victory for Lula,” Angelo Coronel, senator from the centrist Social Democratic party, told the Financial Times before the vote.

The previous spending ceiling, in place from 2017, meant budgets could not rise by more than the rate of inflation. Investors saw it as a tool to stabilise Brazil’s debts.

For Lula and his leftwing Workers’ party, however, it was an obstacle to improving livelihoods in a nation where about 60mn people live in poverty.

The new fiscal regime comes as the outlook for the economy brightens. Forecasts for 2023 gross domestic product growth have been revised up to an average 2.3 per cent, from 0.8 per cent at the start of the year, according to a central bank survey of economists, driven in part by booming agribusiness.

At the same time, Brazil’s central bank has begun monetary easing, cutting the benchmark lending rate by half a percentage point to 13.25 per cent this month.

Under the new fiscal framework, expenditure will be allowed to rise annually by up to 70 per cent of the preceding year’s increase in government income. Within this, spending must grow annually by a minimum of 0.6 per cent above inflation, up to a maximum of 2.5 per cent.

Finance minister Fernando Haddad has pledged to achieve a balanced budget before debt interest payments by next year, intending to raise revenues with measures such as duties on online gambling and a clampdown on tax evasion.

However, there is scepticism in the financial sector that the administration can eliminate the budget deficit without increasing taxes. Many economists believe revenue collection goals are too optimistic and criticise the absence of any meaningful reduction in spending.

“The new framework is weaker than the spending cap when it comes to its ability to rein in the rise in public debt,” said Marcos Casarin, chief Latin America economist at Oxford Economics.

“By shifting the focus away from spending and into a primary balance target, the new rule grants the government more leeway to increase spending by allowing authorities to artificially boost the following year’s revenue target. This perverse incentive is what weakens the rule.”

Additional reporting by Beatriz Langella in São Paulo

Rayna Prime

Rayna Prime

Rayna Prime Editor