Lula’s Team Wants to Strip $32.4 Billion from the Spending Cap

(Bloomberg) — Brazilian President-elect Luiz Inacio Lula da Silva will ask congress to bypass a key fiscal defense by excluding the country’s most important social program from a public spending limit to pay for his campaign promises.

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Lula’s team will ask lawmakers to remove the program indefinitely, according to the initial draft of a proposal to be turned into a constitutional amendment bill according to the rapporteur of the 2023 budget bill, Senator Marcelo Castro. Excluding the program, that means removing 175 billion reais ($32.4 billion) from the limit.

The new administration needs congressional approval to override the spending rule, which limits growth in public spending to the previous year’s inflation rate.

The leftist leader is rushing to secure funds to pay for top campaign promises including increased cash payments to the poor by the time he takes office in January. Still, those plans are raising concerns among investors worried about the depletion of public coffers in Latin America’s largest economy. More spending could put pressure on inflation and delay interest rate cuts.

It involves popular monthly payments of 600 reais that will drop to 400 reais next year because Congress and current President Jair Bolsonaro did not set aside enough funds in the 2023 budget. More broadly, Lula also promised to increase funds for health, education and the environment, as well as public investment.

According to the proposal submitted to Congress, the government will use 60% of the unexpected income to reduce public debt. Another 40% of the extraordinary income will be used for public investment, which the transition team estimates at over 20 billion reais. Expenses paid for by donations to universities and to protect the environment will also be excluded from the ceiling rule.

Poor families and children are the top priority of the new administration, Vice President-elect Geraldo Alckmin told reporters on Wednesday, adding that public investment and social spending cannot be compromised. He said a new fiscal rule will be discussed at a later point, without elaborating further.

Some economists in Lula’s transition team have warned of the negative signals that more spending without a credible fiscal anchor could send investors. Indeed, the nation’s currency and benchmark stock exchange sank last week as markets grappled with the new government’s economic plans.

Over the weekend, after markets reacted negatively to Lula’s proposal to exceed the spending cap by billions of dollars, some of the economic transition team suggested exempting 130 billion reais from the limit for one year.

The idea was discussed, but dismissed after Lula’s political advisers said the president-elect would be a hostage to lawmakers, especially central parties who exchange support for funds and space in government, for the rest of his term. The political team argued that it would be better to try to negotiate a larger waiver for longer to reach the situation.

The economic team even suggested limiting the spending from a cap for four years, but Lula’s political advisers preferred to leave the proposal without an exact time frame.

Asked if former central banker Persio Arida, Alckmin’s most important economist in the transition team, agreed with the proposal, Senator-elect Wellington Dias, who is negotiating with Congress on behalf of Lula, responded , that it is “after the discussion”.

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