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Lula’s Team Delays Announcement of Major Spending Plan
(Bloomberg) -- Brazil’s President-elect Luiz Inacio Lula da Silva delayed the much-awaited announcement of a multibillion-dollar spending plan as his team continues to discuss ways to pay for his main campaign pledges.
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Lula returned to Sao Paulo over the weekend after a short break to oversee the process. But after a long day of closed-door meetings, a news conference scheduled for Monday was delayed for later in the week. Vice President-Elect Geraldo Alckmin is returning to Brasilia, where he is expected to announce additional members of the transition that’s under his leadership.
Lula needs to move fast to avoid any disruption to social aid payments. Outgoing President Jair Bolsonaro has boosted cash payments through his Auxilio Brasil program to 600 reais a month, but set aside money for only 400-real handouts in next year’s budget. An additional 50 billion reais ($10 billion) are needed to maintain the benefit at the current level.
But Lula has also promised to boost cash transfers for poor families with children under age 6, exempt more people from income tax and increase the minimum wage to 1,320 reais, above the rate of inflation. In order to cover all of these pledges, he’ll need something between 160 billion to 200 billion reais in additional funds, according to people with knowledge of the matter.
Anxiety about the size of Lula’s spending plan, coupled with questions about who he will appoint as finance minister, weighed on local markets on Monday. The Brazilian real weakened 2% to 5.1621 per dollar, the worst performer among emerging market currencies. The benchmark Ibovespa stock index lost 2.4%.
Breaching the Cap
Any extra spending will require approval from congress as it will break the country’s main fiscal rule -- a constitutional cap that limits growth of public expenditures to the previous year’s inflation rate. While markets have already priced in that the cap will be breached, there’s concern about government finances and how the proposals will be negotiated with congress.
There are two main options on the table. The first is a constitutional amendment allowing the government to breach the cap. It would need to be approved in 2022, even before Lula takes office.
The alternative would be for Lula to sign a provisional measure as soon as he takes office, allowing the treasury to issue an extraordinary credit that’s not subject to the spending cap rule just to keep the current level of cash handouts. Other campaign promises would be negotiated later.
Read More: Lula to Mix Old, New Allies to Solve Brazil’s Cabinet Puzzle
A provisional measure would not require immediate congress approval, giving some time for Lula to negotiate with lawmakers. Eventually, the new government will have to negotiate with members of the so-called centrao, an ideologically fluid group of lawmakers who usually support the administration in exchange for funds for their projects.
“A constitutional amendment puts the lower house in charge,” Senator Renan Calheiros, an ally of the president-elect, said in an interview.
Calheiros, who’s an adversary of lower house Speaker Arthur Lira, has been advising Lula to issue a provisional measure instead. Senator-elect Wellington Dias, Lula’s point person in early negotiations with congress, said all alternatives are being discussed, although he favors a change to the constitution.
“Our priority is the constitutional amendment,” he said in a text message on Saturday. “But we also analyze other possibilities presented to us.”
Although negotiations are still ongoing, Lula’s team is likely to choose a constitutional amendment proposal for the extra spending in 2023, according to Senator Marcelo Castro, rapporteur to the 2023 budget bill. According to him, the constitutional amendment is would give the new government more legal security.
--With assistance from Barbara Nascimento and Maria Eloisa Capurro.
(Recasts story with delay in announcement of the spending plan.)
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