Plan to be presented by December aims to establish measures as state policy, ensuring their continuity regardless of the administration in power

10/15/2024

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A “significant package” of spending review measures is expected to be presented this year, an official of the economic team told Valor. The aim, the person explained, is to position these measures as state policy, meaning an effort that should continue regardless of which administration is in power.

Experts are considering announcing the measures after the municipal elections. While details of the proposed changes have not been disclosed, one criterion will be the alignment of a given expense with the fiscal framework. If the expense is incompatible, the government would face two options: change the fiscal rules or “do what needs to be done.” The Finance Ministry’s preference, the source said, is to uphold the framework.

To ensure the package’s approval, the plan is to appeal to both the legislative and judicial branches for a pact on the sustainability of public finances.

The measures, the person noted, are in line with a report by rating agency Moody’s, which earlier this month upgraded Brazil’s sovereign rating to just one notch below investment grade. The agency observed that the credibility of the fiscal framework is at a “moderate” level, reflected in relatively high debt costs. However, it believes that the potential for sustainable economic growth and the adoption of measures that support compliance with the fiscal framework justify the positive outlook.

The announcement of the spending review program was first mentioned by Finance Minister Fernando Haddad at an event hosted by Itaú Unibanco on Monday (14). When asked about changes to personal income tax (IRPF), he said the proposal was not yet ready and that before presenting it, he intended to submit a spending review program to Congress.

The importance of addressing spending adjustments was echoed by incoming Central Bank President Gabriel Galípolo at the same event.

The end of municipal elections is the target date for presenting these measures, as outlined by experts involved in the program’s development. Some believe the best window for approval is at the end of this year, during the final stretch of the current Lower House speaker and Senate president’s terms.

As reported by Valor on October 8, at least one spending review measure is expected to be sent to Congress before the end of 2024. The current trend suggests a more comprehensive package will be submitted.

The government’s spending review has three key pillars. The first is a detailed audit of programs such as Social Security, the Continued Payment Benefit (BPC), and unemployment insurance for fishermen. The second is the redesign of programs like the salary bonus and unemployment insurance. The third focuses on “modernizing” the indexation of expenses, ensuring their growth aligns with the fiscal framework.

“Submitting measures to curb mandatory expenses is a step toward normalizing the situation,” said Alexandre Manoel, chief economist at AZ Quest. It’s also an opportunity to reverse a negative trend. “We are heading towards a crisis via the credit channel.”

The financial market’s pessimism about public finances, which has driven future interest rates to around 13%, stems from doubts over President Lula’s support for the program proposed by the economic team, Mr. Manoel said.

The economic team’s strategy assumes that by 2025, fiscal policy will no longer be expansionary, as it has been until now with the injection of funds into the economy. At the same time, interest rates are expected to remain high, resulting in an economic slowdown, Mr. Manoel explained.

The most pessimistic view is that the government will not tolerate this scenario and will change the fiscal framework, he said. However, submitting the review measures would signal support for the current strategy.

There is an overreaction in the current wave of market pessimism regarding fiscal policy, said Fernando Montero, chief economist at Tullet Prebon Brasil. However, he noted similarities between the evolution of public finances under the current government and during the Dilma Rousseff administration.

The Brazilian real gained ground against the U.S. dollar after statements from Mr. Haddad and Mr. Galípolo. “The market is so bad right now that even narratives are affecting prices,” Mr. Montero joked. “At least it’s the right narrative.”

For Paulo Bijos, a budget consultant for the Lower House who led the Federal Budget Secretariat until mid-year, “the spending review is the most important agenda for Brazil right now.”

By Lu Aiko Otta, Guilherme Pimenta — Brasília

Source: Valor International

https://valorinternational.globo.com/