Pandemic Spending Pressure Puts Brazil Fiscal Rule at Risk

Brazil looks set to break a key fiscal rule to provide another round of financial aid to the poor as lawmakers pile pressure on President Jair Bolsonaro to act fast during a second wave of Covid-19.

Economy Minister Paulo Guedes has tried to protect the so-called spending cap rule by proposing an emergency constitutional amendment that would allow the government to reduce mandatory spending in other areas -- a process that would require lengthy negotiations with congress. Legislators, meanwhile, are pushing to quickly resume the payments, which ran out in December, as the pandemic roars back.

The pressure has made it likely the new aid will breach the rule investors see as a sign of the country’s commitment to fiscal austerity, according to three members of the economic team, who asked asking not to be named because the discussions are not public.

There’s near consensus in congress about the need for a new round of financial aid to poor Brazilians during the pandemic, Senator Alessandro Vieira, a party leader and a lobbyist for more spending to mitigate the virus’ economic impact, said in an interview. He expects talks will speed up in coming days and the program will be approved in both houses by the end of March, with payments beginning in April.

“There’s no doubt the new emergency aid will break the spending ceiling,” Vieira said in a reference to the constitutional amendment that limits public expenditures. “The economic team’s demands on amount, deadlines and other conditions are impossible to meet and only makes things more difficult. It’s almost like they are in denial.”

The economic team, grappling with high public debt and a record deficit, has little room to maneuver the budget. Without the constitutional amendment -- known as emergency bill -- the government could invoke a calamity clause that in effect suspends fiscal rules. That tool was used in 2020 to allow Brazil to spend over 600 billion reais ($112 billion) against the pandemic, including the payment of monthly stipends to informal workers affected by lockdown measures.

Slowdown ahead

The aid, dubbed coronavoucher, is widely credited with ensuring the Brazilian economy fared better than other Latin American nations last year, even lowering poverty rates despite the enormous toll of the virus, which has killed over 233,000 people in the country. It also helped push Bolsonaro’s popularity to the highest level since he took office in 2019.

But economic data have begun to reflect the phasing out of the payments. Retail sales recorded the biggest plunge on record for the month of December amid declines in all major product categories, pointing to a sharp slowdown in the recovery of Latin America’s largest economy.

Despite the worsening of the pandemic, Guedes has shunned short-term extra spending, focusing instead on building a new social program. The minister says Brazil’s economy shows a V-shaped recovery and measures such as cash handouts wouldn’t be needed again because lockdowns that cut the source of income of many informal workers in 2020 are no longer in place.

Brazil Begins Discussing More Financial Aid Amid Virus Surge

Privately, the minister also argues that a new round of aid would be smaller -- discussions have hovered around 200 reais monthly, a third of the amount seen last year -- and not enough to keep people at home. That would cost public coffers 6 billion reais a month, and initial talks are for the new round to last three months.

300 reais

Senators are still debating details of the new aid, but most are pushing for a new cash transfer of monthly handouts of 300 reais for three months and it must come through new public calamity decree, Vieira said.

The economic team, however, is concerned the country’s Audit Court could disagree with the use of the calamity clause again, the people said, asking not to be named because the discussions are not public. A new round of financial aid will require changing Brazil’s fiscal target for 2021, they said, adding that there’s also worry that acting now would leave Brazil out of options to do more if the pandemic worsens again.

The Economy Ministry declined to comment.

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