Brazil Shifts Strategy to Ensure Austerity Amid Social Spending

Brazil will include austerity measures, a new social program and payroll tax reductions into an omnibus bill as part of a new plan of action aimed at safeguarding the country’s fiscal credibility.

Putting the proposals in the same package would secure votes for belt-tightening mechanisms and shield the public spending cap, Senator Marcio Bittar, the bill’s rapporteur, said in an interview. Bittar said he’s seeking approval this year for the bill that’s backed by Economy Minister Paulo Guedes.

“If these measures are not taken together, you risk creating new expenses without reducing others,” Bittar said. “This would be a betrayal of the government economic agenda.”

Brazil Shifts Strategy to Ensure Austerity Amid Social Spending

President Jair Bolsonaro’s administration is facing pressure to distance itself from previous austerity pledges and sustain higher public expenditures amid the coronavirus outbreak. This week, the senate rebuffed a presidential veto on a freeze of some civil servant wages, and Bolsonaro himself has indicated he’s inclined to spend more. That’s sparked speculation that the public spending ceiling, which is one of Brazil’s fiscal anchors, may be at risk.

The bill would include a new social program known as Renda Brasil, or Brazil Income, which will replace emergency aid given to informal workers during the pandemic. The president’s popularity has gotten a boost from that program and it may help his eventual re-election campaign in 2022.

There is ample legislative support for bills that help the poor, Bittar said. At the same time, the legislation will include austerity measures such as a temporary reduction in civil servants’ wages in the case of public spending imbalances.

Guedes plans to reduce company payroll taxes and offset the loss in income with the creation of a new transaction tax, which is included in a separate reform. But to speed up the agenda, there would be a partial payroll tax reduction that could be financed by redirecting money from existing public funds.

The final details of the omnibus bill will be hashed out with members of the economy ministry and submitted to Congress within the next few days, Bittar said. The legislation will go directly to the floor of both houses instead of passing through commissions first, thus increasing odds of a quicker passage through Congress, according to the Senator.

Bolsonaro was elected in 2018 amid pledges to cut debt and boost fiscal accounts, though the coronavirus pandemic prompted him to change course. Amid higher spending, some investors have questioned the future of the nation’s public spending cap which limits increases in expenditures for two decades.

©2020 Bloomberg L.P.

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