Brazil's fiscal package - The government is sponsoring a second change to the spending cap in less than seven months, and while fiscal accounts can absorb that in the short term, this further erodes the cap's creidbility

Breaching the spending cap could threaten the country’s credit profile and long-term inflation targets

Lower commitment to Brazil’s fiscal anchors will likely perpetuate FX volatility and weigh on the currency’s ability to appreciate throughout 2022 and in 2023. MNCs should expect discussions about alternatives to the current version of the spending cap to gain momentum during the electoral campaign, which begins in mid-August, and later in Q4 around the budget discussions. Amid elevated uncertainty, businesses should adopt a scenario planning approach that accounts for varying outcomes on the fiscal front that could impact Brazil’s economic outlook and operating environment in the medium term. 


In mid-July, Brazil’s lower house approved a constitutional amendment that places the country under a state of emergency until the end of 2022, allowing the government to increase economic aid measures to blunt the impact of still-high inflation and temporarily waive the country’s constitutionally mandated spending cap. The BRL 40 billion package, partially financed by the privatization of Eletrobras, will include cash handouts for truckers and vouchers for cooking gas. However, the bulk of its resources will be dedicated to expanding the country’s cash-transfer program, Auxilio Brazil, both in terms of the level of funding allocated to the program (from BRL 400 to BRL 600) and the number of beneficiaries. Through the expansion of cash transfers, the PEC will benefit the service and retail sectors, while Brazil’s manufacturing should continue to experience difficulties.

Our View

While the approval of the latest fiscal stimulus package will provide a brief boost to Brazil’s economy, the hike in public spending should spark concerns about the future trajectory of the country’s fiscal deficit and sovereign debt. The PEC weakens Brazil’s commitment to the spending cap—the country’s only binding fiscal rule—by creating a precedent of removing mandatory expenses from the cap. Additionally, as the election season progresses and 2023 budget discussions begin in late August, leading candidates have expressed their intentions to revisit or repeal Brazil’s spending cap. Ultimately, breaching the spending cap and growing rhetoric around loosening the fiscal environment would push government debt—already at high levels—even higher, threatening Brazil’s credit profile and long-term inflation targets.

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