Bolsonaro Sticks to Brazil Spending Cap Amid Cabinet Controversy

(Bloomberg) -- President Jair Bolsonaro ruled out changes to Brazil’s public spending ceiling a day after suggesting the measure needed to be eased to avoid a government shutdown.

Comparing Brazil to a transatlantic cruise liner, Bolsonaro tweeted on Thursday that giving up on the ceiling would mean “opening a crack in the ship’s hull.” Instead, he added, the government needs to “cut spending, combat fraud and waste.”

His statement marked a change of tone from previous days. Just 24 hours earlier, Bolsonaro had said that, if nothing was done, he’d have to “cut the power” of all military buildings in the country. And late on Wednesday his spokesman said the president could send a proposal to Congress to relax the ceiling.

The about face came after an appeal from Economy Minister Paulo Guedes last night. “I spoke to Guedes and we won’t change the ceiling,” Bolsonaro said at an event on Thursday.

Growing Pressure

The episode underscores growing pressure on the president to ease the spending ceiling -- a constitutional amendment approved under former President Michel Temer in 2016 that became a pillar of investor confidence in Brazil. The measure was designed to tackle the country’s growing budget deficit by limiting government spending increases to the previous year’s inflation rate. This year, the ceiling stands at 1.4 trillion reais ($342 billion).

Debate about the need to relax the spending cap has been raging within the government for months. Some members of Bolsonaro’s cabinet defend a softer rule because the room for discretionary expenses, which includes public investment, has been shrinking every year, said a person familiar with the discussion. In 2020, for example, public investment is projected at 19 billion reais, the smallest level in history.

Brazil Mulls Change to Public Spending Cap Amid Weak Revenue

Yet Guedes defends that the government should instead shrink the public administration and free up the budget, according to a member of the economic team. Mandatory expenses, particularly pension payments and salaries, consume 94% of the federal budget. Brazil’s constitution also determines that part of the federal revenue needs to be spent in certain areas such as health and education, leaving the government with limited room to maneuver.

A third person at Guedes’ economic team said that, by implementing a strict fiscal policy, the government would be able to meet the spending ceiling this year and next. Without approving budget reforms next year, however, it would be extremely difficult to do so in 2021, added the person.

To contact the reporters on this story: Martha Beck in Brasilia at mbeck96@bloomberg.net;Simone Iglesias in Brasília at spiglesias@bloomberg.net;Rachel Gamarski in in Sao Paulo at rgamarski@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Walter Brandimarte

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