Temer offers spending cap in effort to fix Brazil’s budget

Bloomberg

Brazil’s Acting President Michel Temer proposed to legislators spending caps that are designed to shrink a near-record budget deficit and restore investor confidence in Latin America’s largest economy.
The proposal would amend the constitution, essentially freezing current government expenditures in inflation-adjusted terms through 2036, though there would be the possibility of adjustments after the first 10 years, according to a statement from the Finance Ministry. Any increase in revenue stemming from an economic recovery would go to narrow the budget deficit instead of more spending.
Brazil’s budget gap has ballooned in recent years to around 10 percent of gross domestic product as tax revenue slumped amid a prolonged recession.
Temer’s measure would not only help put Brazil’s public accounts back on track, but also would boost consumer and business confidence, said Finance Minister HenriqueMeirelles. “The government works like any household, company or organization,” Meirelles told reporters after the proposal was presented.

The Proposal
Under the proposal, all expenditures would be adjusted merely by the previous year’s inflation rate, including outlays for health and education. Spending for those two areas is currently adjusted based on tax income.
The government isn’t considering tax increases for now and will present proposals for further spending cuts, including pension outlays, which is the third-largest spending category, not including debt servicing, Meirelles said. In an effort to help enforce the new rules, the government proposes penalties for state entities that include a freeze on salaries and hiring of civil servants.
Temer’s amendment requires a two-thirds majority in both chambers of Congress. During his first month in office, the acting president won by a wide margin approval for legislation that reduces legally-mandated spending requirements, a measure that makes it easier to cut expenditures.