Brazil's lower house of congress has approved new fiscal rules, signaling the finalization of legislation intended to stabilize the country's public finances and address market concerns about President Luiz Inacio Lula da Silva's spending plans. The fiscal plan, voted in favor by 379-64 in the lower house, will now be sent to Lula for his signature, paving the way for his administration to align the 2024 budget plan with the new rules.
The passage of the bill has contributed to the strengthening of the local currency, as the real gained 0.8% against the dollar amid a broader rally triggered by a drop in Treasury yields. The version approved by the lower house includes a slight toughening of the one passed by the Senate in June, removing a provision that would have allowed the government to spend an additional 40 billion reais ($8.1 billion). However, a deal has been reached to permit the government to restore that spending through the annual budget process.
The fiscal rules will allow the government to increase spending by a range of 0.6% to 2.5% above the inflation rate, limited to 70% of revenue growth. This framework, spearheaded by Finance Minister Fernando Haddad and Lula's economic team, will replace a spending cap that was previously in place to restrict expenditures.
This fiscal framework is considered a significant priority for the government, as it aims to demonstrate its commitment to fiscal austerity and reassure skeptical investors. The initial passage of the plan earlier this year received positive feedback from investors who were wary of the government's dedication to fiscal discipline.
It is worth noting that the lower house has maintained Senate amendments exempting funds for education and the Federal District from the fiscal framework, emphasizing the importance of these areas. This decision aims to strike a balance between fiscal consolidation and maintaining investments in critical sectors of the economy.
Overall, the acceptance of Brazil's fiscal plan by the lower house signifies an important step towards stabilizing the country's public finances and building investor confidence. With the inclusion of these new fiscal rules, the government aims to create a sustainable budget plan for the coming years, ensuring the stability and growth of Brazil's economy.