Brazil's Government Prepares Spending Measures

By Marcela Ayres and Lisandra Paraguassu

BRASILIA (Reuters) – Brazil's government is planning measures to limit spending by applying a general cap on health and education expenditures, similar to existing caps on other outlays. This initiative, still under discussion, aims to address fiscal concerns linked to the recent depreciation of Brazil's currency, the weakest since March 2021, amidst volatile trading surrounding the U.S. election.

Sources indicated that the government plans to remove the exemption for health and education from fiscal rules established under President Luiz Inacio Lula da Silva's administration. These rules incorporate annual fiscal targets alongside a cap of 2.5% growth in spending over inflation.

The Finance Ministry has refrained from commenting on the ongoing discussions. Finance Minister Fernando Haddad previously mentioned that the government is working on extending the lifespan of the new fiscal framework, potentially announcing it this week.

Lula's chief of staff is scheduled to meet with the ministers of social security and social development to discuss these new fiscal measures, according to an official statement.

Currently, health spending must be at least 15% of net current revenue, while education spending must hit a minimum of 18% of net tax revenue. As revenues increase, these categories have taken up a larger portion of the budget.

During recent meetings, both the health and education ministers showed minimal resistance to the proposed plan, as they are already spending below their allocated budgets. The Education Ministry did not respond to comments, but the Health Ministry indicated it will reply when possible.

Key mandatory expenses like pensions and some social programs are rising faster than the overall spending cap, leading to a squeeze on discretionary spending and posing risks to the new fiscal framework.