Why Brazil is on course to shatter its fiscal 'ceiling'

BRASILIA Brazil’s constitutional spending cap, a cornerstone of fiscal policy in recent years, is on course to being broken in 2021.

Government officials insist it will not be altered, warning that to do so would dent the government’s credibility and rattle investor confidence in Brazil, pushing up interest rates and hurting growth.

But with Brazil’s economy on track for its biggest annual crash ever due to the coronavirus pandemic, the need for fiscal support has never been greater. A growing number of economists argue the spending cap must be raised, tweaked or abolished.

WHAT IS THE FISCAL ‘CEILING’?

In December 2016, Congress passed a 20-year ‘ceiling’ to slow public spending growth, control a ballooning budget deficit and bring public finances back to long-term health.

The constitutional amendment limits the growth in federal government expenditure to the previous year’s rate of inflation.

WHY SO LITTLE ROOM TO MANEUVER?

Obligatory spending, such as public-sector pensions, salaries, social security and education, account for more than 90% of all outlays, leaving little room for discretionary expenditure, such as infrastructure and other public investment.

Pensions alone make up half the pie. An aging population and ample coverage for public pensions are expanding that bill faster than inflation, forcing the other half of the pie to shrink in nominal terms, never mind real terms.

However, that second half includes health and education expenditure, which have their own spending ‘floors’ guaranteeing minimum outlays. It also includes public-sector salaries, which are constitutionally prevented from falling.

WHERE ARE CRACKS APPEARING?

The orthodox view shared by the Economy Ministry, central bank, many lawmakers, most investors and mainstream economists is that the cap is virtually sacrosanct.

However, the COVID-19 crisis has brought the fragility of the budget rule into sharp focus. A growing number of economists say it must be changed to prevent a disastrous collapse in public investment.

Next year’s budget is capped at 1.485 trillion reais ($275 billion), only 31 billion reais more than this year. That would give very little room to maneuver in normal times, let alone during a pandemic that has tanked the economy.

Congress passed a parallel ‘war budget’ of about 600 billion reais this year as part of a nationwide “state of public calamity” – emergency spending not subject to the spending cap.

With some lawmakers now pushing to extend that pandemic stimulus into next year, Brazil’s budget is on a collision course with the constitutional ‘ceiling.’

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