Four senior Brazilian Treasury officials resigned on Thursday amid signs the government is looking to lift a constitutional spending cap, hammering Brazil‘s stocks and currency while driving up interest rate futures.
The reason behind such a move is a political trap built inside the Planalto Palace: to secure a budget for the launch of Auxílio Brasil, an income transfer program that President Jair Bolsonaro wants to launch to replace Bolsa Família, the current aid program for the poorest families and which is the great political symbol of former President Luis Inácio Lula da Silva, who will probably run for President against Bolsonaro in 2022. The Congress’ lower house is likely to approve the measure.
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With Bolsonaro’s popularity slipping and headlines focused on a Senate inquiry calling for criminal charges based on his handling of the pandemic, the president has pushed for more government spending ahead of next year’s election.
Economy Minister Paulo Guedes said late on Wednesday that the government may try to exempt BRL 30 billion ($5.3 billion) of spending from its fiscal ceiling in order to boost welfare spending at Bolsonaro’s request.
In a sign of the widening schism over fiscal issues, Brazil‘s two most senior Treasury officials and their two deputies submitted their resignations on Thursday “for personal reasons,” according to a statement from the Economy Ministry.
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Allies in Congress have moved swiftly to open space for more election-year spending. Lawmaker Hugo Motta offered on Thursday to shift the calendar for an annual adjustment of the spending cap as part of a constitutional amendment he is sponsoring to parcel out payments of the government’s court-ordered debts.
Taken together, the measures would open space for nearly BRL 96 billion of additional spending next year, tweeted Felipe Salto, head of the Senate’s fiscal watchdog IFI, citing preliminary calculations.
In a speech on Thursday, Bolsonaro also promised some 750,000 truckers relief to offset rising diesel prices, without giving details. He repeated a vow to more than double payouts from Brazil‘s main welfare program in a fiscally “responsible” way, although markets shrugged off his assurances.
Brazil‘s benchmark stock index plunged nearly 5% in Thursday trading, finishing down 2.8% at its lowest close since November. The real weakened nearly 2%, testing levels near 5.7 to the U.S. dollar for the first time since April.
Markets closed before the Economy Ministry announced the exit of Treasury officials Bruno Funchal and Jeferson Bittencourt, two of the most senior aides to Guedes on fiscal policy.
Interest rate futures showed bets on even more aggressive rate increases by the central bank to contain inflation already running in double digits over the past 12 months.
JPMorgan analysts shifted their call for upcoming monetary policy meetings, forecasting that the central bank will hike rates by 125 basis points next week and again in December instead of its prior outlook for continued 100-basis-point increases.
The proposal to exempt additional welfare spending from the spending cap “is already jeopardizing the credibility of the fiscal sustainability,” they wrote, adding that policymakers may turn even more aggressive with a 150-basis-point hike next week.
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The JPMorgan analysts warned of fresh stimulus “backfiring” by forcing the central bank to tighten financial conditions, threatening a forecast for the economy to grow 0.9% next year.
In September, Bolsonaro signed a decree to raise taxes on financial transactions (the so-called IOF tax) for three months to pay for Auxílio Brasil, a cash transfer program that could replace Bolsa Família.
The higher IOF tax, which is charged on credit, foreign exchange, insurance transactions, or bonds or securities, is expected to generate BRL 2.14 billion ($407.13 million).
By defining the change by decree, Bolsonaro prevented the issue from being analyzed by the National Congress. The new rates took effect at the end of September and will continue in force until December 31st. The IOF is calculated daily. Under the previous rules, individuals paid 1.50% per annum of IOF, and legal entities 3%. With the change, these rates went to 2.04% and 4.08% per year, respectively.