Brazil Senate Backs Covid Aid With Fiscal Fix as Pandemic Soars

Brazil’s senate backed a $7.8 billion round of Covid aid for the poor as a new wave of the pandemic batters the economy and pushes the health system to the brink of collapse.

The plan to revive last year’s cash handout program is part of a constitutional amendment that includes compensatory fiscal measures demanded by Economy Minister Paulo Guedes to show the government remains committed to austerity after a record budget deficit in 2020.

Senators approved the so-called emergency bill in two rounds of voting on Wednesday night and Thursday. They rejected all amendments that sought to further water down Guedes’s austerity measures, showing organization of government allies and fueling a rally in local assets as investors breathed a sigh of relief. The proposal now moves to the lower house, with a possible vote next week.

Brazil Senate Backs Covid Aid With Fiscal Fix as Pandemic Soars

Brazil’s benchmark stock index jumped 2.2% while the the real gained 1.4%. The currency had already rallied late on Wednesday after lower house Speaker Arthur Lira tweeted that the proposal wouldn’t threaten the government spending ceiling. The rule, which caps the growth of public expenditures to the rate of inflation, is considered by investors as the country’s last defense against runaway budget deficits.

Adding urgency to the matter is a raging coronavirus crisis that is forcing governors and mayors to impose the harshest lockdowns yet across the country, with hospitals overrun with Covid-19 patients and deaths from the virus hitting daily records.

Read More: Brazil’s Economic Rebound Slows as Aid Expires and Covid Spreads

The plan approved by the senate allows the government to take on debt to finance four monthly payments of 250 reais to some 40 million Brazilians at a cost of 44 billion reais ($7.8 billion). Last year, the government spent 322 billion reais on a more generous program that benefited over 60 million Brazilians with stipends of as much as 600 reais per month.

Even if only a fraction of the 2020 program, the new round of stimulus comes as Latin America’s largest economy finds itself in a more fragile fiscal position, following a deficit of nearly 14% of GDP in 2020. Worried about the country’s budget outlook, investors have started shunning long-dated government bonds and forcing the central bank’s hand to raise the benchmark interest rate by at least half a percentage point later this month.

BRAZIL REACT: After 2020 Aid, Policy Gaffes Threaten 2021 Growth

In order to secure the bill’s approval, Guedes had to scrap a number of austerity measures originally included in it. Gone were plans to end mandatory public spending on health and education, as well as a proposal to decrease the workload of public servants and their salaries in case of fiscal crisis.

As it stands, the proposal includes a trigger allowing the government to freeze salaries of public servants and reduce tax breaks, among other measures, whenever mandatory expenses exceed 95% of the budget.

The biggest threat to Guedes’s austerity plan was a proposal backed by many senators to exclude the Bolsa Familia social program from the country’s spending ceiling. After a whole day of negotiations between Guedes and lawmakers, the economic team was able to block the idea.

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