Brazil Plans Spending Controls

By Marcela Ayres and Bernardo Caram

BRASILIA (Reuters) – The Brazilian government is preparing to implement measures to curb mandatory spending after the second round of municipal elections at the end of the month, according to two Finance Ministry officials.

President Luiz Inacio Lula da Silva has primarily focused on restoring the country's fiscal balance through increased tax revenue since taking office last year. However, sources indicate that the government is now considering spending controls to meet budget targets and to stabilize gross debt below 80% of GDP.

Investors and private economists have expressed skepticism regarding Lula's capacity to fulfill budget commitments, as interest rates rise in Brazil. The leftist president is cautious about implementing austerity measures, given his declining popularity in recent polls.

In a recent radio interview, Lula stated his intention to expand an income tax exemption for the poor, committing to fulfill this election promise by the end of his term in 2026. This exemption has gained prominence following reports that the government could increase taxes on millionaires to offset an estimated 35 billion reais fiscal impact.

Nonetheless, one source mentioned that the government's economic team believes implementing spending controls is more urgent. Another source indicated that containment of mandatory expenses is necessary to reinforce Brazil's fiscal framework, allowing for more discretionary spending.

The rapid growth of mandatory expenses, such as public salaries and pensions, is crowding out investments and other programs due to a spending cap established under the new framework.

Having initiated efforts to control expenses by cleaning up public registries and addressing fraud in social programs, the government is now preparing proposals that will require congressional approval, according to one source. The initial package will focus on specific expenditures, likely followed by a second, more robust set of structural proposals, without details provided.

Since last month, officials have mentioned that the rules governing the BPC program, Brazil's second-largest social program aimed at seniors over 65 and people with disabilities, are under review. The 2025 budget bill allocates 112.9 billion reais for the program, reflecting a 12.7% increase from this year.

(1 USD = 5.61 BRL)