Brazil’s budget will leave the government in a difficult situation

(Bloomberg) – A deadlock between Brazil’s economic team and Congress over this year’s budget will likely see President Jair Bolsonaro agree to only part of his economy minister’s pleas for austerity, while lawmakers They push to increase spending before next year’s elections.

Bolsonaro agreed to reject part of the budget proposal to accommodate mandatory spending that lawmakers purposely underestimated. But the vetoes will hardly equate to what Guedes is pushing, according to four people with knowledge of the matter who requested anonymity because the discussions are not public.

The economic team seeks to reserve between 20 and 30 billion reais (US $ 3.6 billion to US $ 5.3 billion) for mandatory spending on social security benefits, two of the people said. That would mean less money for investment projects supported by legislators in their home states, an increasingly difficult proposition as everyone struggles for scarce funds to please their constituents.

So far, lawmakers have offered to cut around 10 billion reais from their bills. A Guedes adviser said the figure is still being negotiated and must take into account legal and political considerations.

Guedes has spent the last few weeks warning Bolsonaro that the federal audit court could reject the government’s accounts if the president approves an unworkable budget. The court’s opinion is sent to Congress and could even be used as justification for an impeachment process similar to that of former President Dilma Rousseff.

Mandatory expenditures would inevitably have to be addressed throughout the year, Guedes warned, forcing the government to break constitutionally set spending rules that investors see as the country’s last line of defense against fiscal disorder.

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Concerns about additional government spending this year, in addition to a 44 billion reais cash handover program approved by Congress to help the most disadvantaged during the coronavirus crisis, have left investors on edge. They fear that, after spending nearly 14% of gross domestic product to cushion the economic impact of the pandemic in 2020, Brazil will not have a credible plan to balance its budget, which could further weaken the currency, boost inflation and derail. the recuperation.

Expressing his agreement with such concerns, the head of the central bank, Roberto Campos Neto, has warned twice in the last three days that the uncertainty surrounding the budget bill would lead investors to demand more returns to buy government bonds, which could undermine monetary policy.

Political reality

On the other hand, Bolsonaro’s political advisers constantly remind him that this year’s budget will be crucial to seek re-election in 2022, when he is likely to face his rival Luiz Inácio Lula da Silva, the leftist former president who returned to the political game. after a superior court judge threw out their criminal convictions.

The budget episode is also the latest chapter in the deteriorating relationship between the president and his economic czar, who took office in 2019 with super-minister status promising to fix Brazil’s finances and fuel growth with an aggressive program of privatization and economic liberalization.

However, even before the budget deadlock is resolved, another dispute looms between Guedes and Bolsonaro’s political team: the use of the so-called calamity clause that was used last year to exclude from the budget cap rule. I spend all the incentives granted to mitigate the effects of the covid.

The minister argues that making use of that mechanism again this year would not be reasonable. Campos Neto joined him on Tuesday and told him that invoking the calamity clause this year would be worse for the economy than the pandemic itself. But that possibility is already under discussion for the second half of the year if Brazil’s vaccination campaign does not gain ground and the pandemic shows no signs of abating.

Original Note: Brazil’s Budget Impasse to Leave Economy Chief in Tougher Spot

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