Brazil Unveils New Budget Rules, Easing Market Fears On Fiscal Discipline

• Brazil's finance ministry unveiled on Thursday, March 30, a proposal for new fiscal rules to balance limits on spending growth with the government's vow to boost social programs and public investment, lifting local markets after months of uncertainty.
• The long-awaited proposal is key to easing fiscal concerns after leftist President Luiz Inacio Lula da Silva secured congressional approval to bypass a constitutional spending cap. His spending vows and criticism of the central bank have pushed up inflation expectations since he took office in January.
• Notably, the new fiscal framework targets a zero primary deficit in 2024, followed by a primary surplus equal to 0.5% of GDP in 2025 and 1% of GDP in 2026. The primary budget target would have a margin of plus or minus 0.25 percentage points.
• Additionally, the new rules would allow public spending to grow between 0.6% and 2.5% per year above inflation. Spending growth would also be limited to 70% of revenue growth in the prior 12 months.
• Brazil's benchmark stock index rose 1.5%, and its currency firmed slightly against the U.S. dollar to a nearly two-month high as analysts greeted the proposal with measured relief, highlighting questions about its details and execution.
• This year's primary deficit target, the first of the Lula administration, is 228.1 billion reais (US$44Nn). However, the finance ministry recently estimated that the shortfall will be 107.6 billion reais, equal to 1.0% of GDP, helped by a jump in expected tax revenue.

(Source: Reuters)