Brazil’s Budget Impasse Drags On Amid Lula’s Concerns Over Social Impact

Martha Beck and Simone Iglesias
·2-min read

(Bloomberg) -- Brazil’s announcement of much-awaited spending cut measures is on hold amid President Luiz Inacio Lula da Silva’s indecision over the impact on social programs, adding to investors’ concerns about the country’s fiscal outlook.

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Closed-door discussions between different ministries and Lula have failed to yield much progress so far. The president has several proposals to cut spending on the table but is hesitant to carry out a plan that would impact the poor, and is still mulling which social programs could face reductions to help balance the budget, according to people with knowledge of the matter.

The government’s announcement was expected for last week, after Finance Minister Fernando Haddad said a package was almost ready and there were only two details Lula had to decide. After a series of meetings, however, Lula still hasn’t done so.

Increasing fears over the size of the country’s fiscal imbalance have weighed on Brazilian assets throughout the year, turning the real into one of the world’s worst-performing major currencies. Skittish investors have been anxiously awaiting the package. Traders eye a year-to-date low for Brazilian real near 5.88 a dollar, while the drawn out discussions fuel concerns that the bill will have a diluted effect on fiscal accounts.

Lula will not speed up the process in response to the market’s woes, the people said, asking for anonymity to talk about internal matters.

“I know the market’s speculative greed,” Lula said in an interview with broadcaster RedeTV! over the weekend. “I beat them once and I will win again,” the leftist leader said referring to the markets.

Lula’s economic team has proposed a limit on all mandatory expenditures of up to 2.5% above inflation per year. If those expenses — which include social security, social benefits, and jobless claims, among others — rise above that level, then automatic containment measures would be triggered.

A second proposal targets only some programs that would be included in the rule, according to one of the people. A review on the rules for unemployment benefits and social programs for the elderly are also under discussion.

The plan could reduce spending in a range from 30 billion reais ($5.2 billion) to 50 billion reais, depending on what proposals president Lula decides to push forward, said the people.

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