Brazil's lower house limits extra govt spending to one year

Brazil’s lower house approved in a first vote a constitutional amendment to increase the government spending cap by 145bn reais (US$27.8bn) for 2023, the first year of incoming president Luiz Inácio Lula da Silva’s administration.

The vote provided some relief for investors regarding the country's fiscal stability, as earlier this month the senate’s constitution and justice committee had approved the same increase for both 2023 and 2024.

"The lower house did not give the incoming government a blank check… In my opinion, this has a lot to do with lawmakers wanting to have greater bargaining power with the government next year rather than a commitment to fiscal responsibility," Andre Perfeito, former chief economist at local brokerage Necton, told BNamericas.

The extra spending limit for next year now needs to be approved in a second vote in the lower house and also by the senate. The current rules limit the increase in government spending to inflation.

After the latest vote, Brazilian assets appreciated, showing investors were relieved as more government spending would mean greater inflationary pressures in the coming months.

The constitutional amendment is aimed at maintaining social programs to help low-income families, such as Bolsa Família. Lula will take office January 1.

Originally, his transition team requested authorization for extra spending of 175bn reais a year above the spending cap for his four-year term. 

Since Lula's election at the end of October, market players have been looking for signs as to whether the new government will reinforce fiscal policies.

Lula recently named his Workers Party (PT) colleagues Fernando Haddad and Aloizio Mercadante as his finance minister and president of development bank BNDES, respectively.

The nominations have frustrated investors who would have preferred the two positions to be filled by economists with more centrist backgrounds, especially given that Lula's campaign was backed by a broad political spectrum.

"I personally don't think investors should have concerns about Brazil's fiscal side next year and in 2024. If we look at it in historical terms, generally the first two years of new governments tend to see greater fiscal rigidity, while the last two years of the term involve more spending, since the government is starting to look to the next elections," said Perfeito.