Brazil enacts new fiscal regulations to curb soaring public debt


The Brazilian Chamber of Deputies has passed the new fiscal framework proposed by President Lula to prevent a surge in public debt. The new framework sets a more flexible spending cap, which has been welcomed by financial markets and rating agencies.

On Tuesday, the Brazilian Chamber of Deputies passed the new fiscal framework proposed by President Luiz Inacio Lula da Silva, a move viewed by the financial community as a critical measure to avoid the risk of escalating public debt.

This new framework, which replaces the constitutional spending cap previously requested to be abolished by Lula, was approved with 379 votes in favor and 64 against. It now awaits formal approval by the president.

The new rules set a more relaxed government spending cap, not exceeding 70% of any income increase. Additionally, expenditure growth is limited to above inflation levels, ranging from 0.6% to 2.5%. If the preset primary budget targets are not met, expenditure growth will be limited to 50% within the income increase.

While not as strict as the constitutional cap in place since 2017, which limited public spending increases to within inflation levels, the new framework was welcomed by the market. Since the framework was first proposed, there has been a decrease in government bond rates.

Furthermore, rating agencies such as Standard & Poor's and Fitch have shown strong agreement, and the independent central bank also considers this a key step to addressing fiscal issues.

Legislators initially passed the bill in May. However, due to amendments from the Senate, the bill had to return to the Chamber of Deputies for a final vote.

Legislators rejected a Senate amendment concerning the inclusion of the annual inflation estimate for the 2024 budget law, which is expected to be submitted to Congress by the end of this month.

The Chamber of Deputies will also vote this week on a bill to raise the minimum wage. The government had hoped to approve in the same bill the Senate's proposals to increase the minimum wage, increase the tax exemption for the poorest, and tax offshore funds to offset revenue losses. However, Chamber deputies have stated they will not vote on these additional provisions.

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