(Bloomberg) -- Brazil’s economic team is going into damage control mode to calm down investors and ensure the government complies with fiscal rules even as President Luiz Inacio Lula da Silva pushes for more social spending.
Concerns about the country’s fiscal outlook, which led investors to sell the real and price in several interest rate hikes last week, grew further when Lula announced on Aug. 26 a plan to increase the number of families benefiting from cooking gas subsidies.
While the program’s price tag is likely to jump by nearly half next year before more than doubling to 13.6 billion reais ($2.4 billion) in 2026, it was the way the government considers paying for it that left investors worried. According to a proposal sent to congress, at least part of the gas subsidy could skirt the country’s fiscal rules through an accounting maneuver making payments be considered as tax expenditures that reduce government income rather than primary spending that is subject to caps imposed by law.
Finance Minister Fernando Haddad did not participate in the discussion of the bill sent to congress and will try to block any attempt to circumvent fiscal limits, according to an official familiar with the matter. His team will work with congress in a bid to change the bill so that no spending is excluded from the rules, the official said, asking for anonymity discuss the subject.
Yet Haddad has an even bigger challenge: allaying investor concerns about the source of financing for next year’s budget. The proposal sent to congress late on Friday counts on 166.4 billion reais in extraordinary revenue to eliminate the country’s fiscal deficit in 2025, as promised by the minister.
The problem is that the government is hoping that part of that money will come from a plan to recover tax debts that has already failed to produce the expected results this year. The negotiation of tax owed by companies to the Treasury was forecast to bring in nearly 55 billion reais this year, but yielded practically nothing. The government now estimates 28.5 billion reais in taxes due will finally come in 2025.
Next year’s budget also counts on 30 billion reais from a renegotiation of tax debts with Brazil’s 10 largest companies, as well as 10 billion reais in concessions that were expected for this year but didn’t happen either.
While Lula has made nods to fiscal responsibility, allowing Haddad to set a zero primary deficit goal, he has remained largely defiant of investor concerns about his spending plans.
“Every time we do something for the poor the market gets nervous”, Lula said Friday during an event in the northeastern state of Paraiba, one of the country’s poorest.
Concern over Lula’s spending policies are among the main drags for the real. The currency is the worst performing in emerging markets this year, with losses of 14% against the dollar.
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