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Finance Minister: Brazil Congress Signals Approval of Spending Ceiling

  • Reuters

FILE - A photo taken with a slow shutter speed shows people walk through a shopping district in Sao Paulo, Brazil, Dec. 1, 2015. Brazil’s finance minister said on Thursday that Congress has signaled its willingness to support tough measures to control spending.

FILE - A photo taken with a slow shutter speed shows people walk through a shopping district in Sao Paulo, Brazil, Dec. 1, 2015. Brazil’s finance minister said on Thursday that Congress has signaled its willingness to support tough measures to control spending.

Finance Minister Henrique Meirelles said on Thursday that Congress has signaled it is willing to approve tough measures to control spending, as Brazil fights to emerge from its worst recession since the 1930s.

Meirelles said he is confident a political scandal that cost the jobs of two of Interim President Michel Temer's cabinet ministers will not hinder planned efforts to enact a permanent ceiling for public spending.

"This is a key discussion that is not subject to mood swings of the moment," Meirelles told Reuters. "I have received favorable signals from Congress, which has the will to tackle this structural problem."

Temer, who has replaced suspended President Dilma Rousseff while she goes through an impeachment trial in the Senate, has shifted toward more market-friendly policies to rescue an economy entering its second year of recession.

Although the proposed spending ceiling has been praised by markets, many economists believe it is not enough to cover a fiscal deficit that could top 10 percent of the gross domestic product for a second straight year.

Without any immediate spending cuts and tax increases it would take years for Brazil to cover its fiscal shortfall that cost the country its coveted investment grade rating in 2015, many economists say.

The Temer government's proposed spending ceiling would limit the growth in expenditures to the rate of inflation of the previous year.

Plugging a massive fiscal deficit could be done more rapidly than some in the market expect, while the new government focuses on longer term reforms, Meirelles said in an interview.

Meirelles said that spending on education and health, which Temer has vowed not to cut, could be allowed to increase faster than inflation as long as other expenditures grow less.

Political turmoil

One of Temer's closest aides, Presidential Chief of Staff Eliseu Padilha, said the political turmoil that dragged down markets only 20 days into his presidency will not hamper efforts to revive the economy.

In a separate interview, Padilha said the government is very confident the Senate will vote to convict Rousseff for breaking budget laws, and it hopes this will happen as quickly as possible to remove any doubt about Temer's legitimacy.

"The government will then have more political authority to act," Padilha said. He hoped the vote could come as soon as the end of July, before Brazil holds the Olympic Games in August.

Latin America's largest economy shrank for a fifth-straight quarter in early 2016 as political instability and the sweeping corruption scandal centered on state-run oil company Petrobras weighed on activity. Gross domestic product fell 5.4 percent from a year earlier and unemployment has hit 11.2 percent.

Within the space of one week, Temer had to drop Planning Minister Romero Juca, a key figure in getting austerity measures approved by Congress, and the minister in charge of fighting corruption, Fabiano Silveira, after leaked recordings suggested they had tried to derail the Petrobras investigation.

Beyond balancing the budget, Temer's plan to revive the economy seeks a reduced role for the state and gives more room to private investors, especially in the energy sector, he said.

Padilha said reform of Brazil's generous pension system, the biggest item weighing on government accounts, will be enacted before the end of the year, though a proposal being drawn up with labor unions has been delayed for an additional 15 days.

Reform of labor laws to make Brazil more competitive will come next, but overhaul of the country’s burdensome and complex tax system is not in the cards yet.

Passage last week of the 2015 budget, authorizing an unprecedented deficit of 170 billion reais ($47.1 billion) this year, was a signal that Temer does enjoy the majority it needs to push through austerity measures.

Brazil could balance its budget by 2018 without having to raise taxes, according to Padilha.

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