BRASILIA (Reuters) – Brazil’s Treasury on Monday presented a proposal for a new fiscal anchor that aims to replace three rules currently in force with just one, which limits the real growth of federal government spending to the trajectory of the net debt.
In a text for discussion, the Treasury stressed that net debt, and not gross debt, “better reflects the impacts of fiscal policy and minimizes constraints on monetary policy management or public debt management”.
Currently, the Brazilian net debt stands at 58.3% of GDP.
According to the Treasury’s proposal, with the indicator above 55% of GDP, expenditures would be allowed to grow by 0.5% in real terms per year in the event of a net debt reduction.
With an increase in indebtedness, there would be no permission for real growth in spending.
With the proposed rule, the lower the net debt and the better the future outlook, the greater the space would be for spending growth, with a bonus of another 0.5% real increase in expenditures if the government’s primary budget balance is positive.
Today, the main fiscal anchor in place is the constitutional spending cap, which limits the growth of expenditures to the inflation of the previous year since 2017.
The government of right-wing President Jair Bolsonaro has bypassed the rule on six different occasions, helping to discredit it.
Leftist President-elect Luiz Inácio Lula da Silva, who takes office on Jan 1, has already stated that he will abolish the spending ceiling but has not yet presented a replacement proposal, triggering speculation in the markets about his future economic policies.
Brazil also has to meet a primary budget balance target set by law every year, and the so-called golden rule, which prevents the government from issuing debt to finance current expenses, such as salaries and social benefits.
Since 2014 the central government, comprised of the Treasury, central bank and Social Security, has posted primary deficits. With public spending outstripping revenue, the government has continually sought congressional authorization to disregard the golden rule.
(Reporting by Marcela Ayres; Editing by Angus MacSwan)
